Leading Entrepreneurship

Most of us know that gross profit margin (gpm) is the percentage of sales, after deducting the cost of sales, remaining to fund overhead and owners’ discretionary income. However, how is it analyzed, and what are the cautionary tales for a high-growth firm?

If GPM is Above Industry Average
If this indicator is desirable, but your compensation margin is not, you should focus your efforts on carefully evaluating your overhead for any potential overspending or unmanaged expenses.

If GPM Below Industry Average
This can be caused by numerous items, including not taking discounts on payables due to inadequate cash flow or carelessness, poor inventory management leading to either high inventory levels causing mark downs or low inventory levels creating productivity issues, poor pricing (such as sales personnel mistakes in calculating prices or pricing without using/knowing actual costs as the basis), poor buying (inadequate negotiating skills, failure to check invoices, or inordinate dependence upon a single supplier), excessive shrinkage (poor inventory control, obsolescence, internal pilfering or employee theft, external theft, breakage), or misclassifications in Cost of Goods Sold (COGS). The “low price, high volume” concept should be used with caution: The real keys to success are cash flow and profits, not sales alone.

Suggestions
At Gambit, we actively seek 3%. An expense reduction, or price increase, of less than 3% separates the average profitable and unprofitable business transaction across all US firms. This may not seem like much at first glance, but considering that a firm generating $5 million in sales could drop an additional $150,000 to the bottom-line by focusing on just one number can be enough evidence to convince almost anyone.