The most lucrative term for any business is "profits". For most businesses profits are the only driving force of their sustenance. We look for profits but many companies commonly make a mistake of not paying enough attention to optimizing their gross profits while starting or managing a business. For the uninitiated, gross profit is the money balance that you have when you subtract the direct costs from the total sales revenue. This is what you have after you pay up for the materials and the labour charges.
Gross Profit Optimization
Monitoring gross profits is important because it helps the company to know if it is at a breakeven stage. It also helps to know if it is earning more than the net amount that it has. This enables you to calculate the risk and returns that your business is facing and getting respectively
Also known as the Gross Profit Percentage is the percentage of sales revenue that a company keeps after paying off its direct costs. It is expressed as the (Gross Profit (total sales revenue- direct costs)/ Total Sales) * 100. This percentage is indicative of the amount of money that the company can spend on its other costs. The higher the percentage the more the amount of sales revenue that is available for usage on other costs and services of the company.
Gross Profit Calculations are important for establishing the gross profit percentage. This percentage can be used to evaluate the revenue that you'd retain from each rupee of revenue. For example, suppose your gross profit percentage is 25 % for every rupee of sales revenue you are retaining Rs. 0.25. This is the money that is available for paying up for your general, administrative and interest expenditures. Software companies have greater gross profit margins than the manufacturing companies.
Gross Profit margin affects profits and breakdown. This is how it does. If a company constantly spends Rs.200,000 as overhead charge and if its gross profit margin is 50 % it will have to reach a sales figure of Rs. 400,000 to cover up for its expenses. By calculating GPM and with Gross Profit Optimization you'll be able to avoid revenue prices that are too low and also breakeven condition. This will ensure that you'll always get good profits.
If your company has good sales, but low Gross Profit Margin it signifies that either the prices being too low is a problem or high direct costs is a problem. This will help you identifying the problem areas. If you cannot identify the problem areas, you'll blunder in your company decision and you'll have to pay a heavy price for that. For example, to increase sales you might offer products at low sale prices, but this will get you small gross profit margin on the whole which is not very helpful for you.
Though a very important structure for business success, gross profit margin does not get the amount of attention that it truly deserves. CFO Services helps you in determining the ideal gross profit margin for your company by providing data from competitors and also from industry records so that you set a target gross profit margin for your company and try to achieve it. The contributory aspects of gross profit margin change over time. The direct costs may rise due to inflation in which case the annual price may be escalated.
CFO Services experts work upon and predict Gross Profit Margins so that they do not fall in the course of time and lead to complications in the cash flow.