This post is one in a series designed to help SME businesses benchmark their business and create a best practice business improvement plan across all of their business processes. You can find the links to the full series here.
What is gross profit and why is monitoring it so important for a successful, profitable business?
Gross profit is the profit a business makes after deducting the costs directly associated with making its products or providing its services. It’s a measure of two critical performance indicators:
- Is the business making enough sales?
- Is the business making enough margin on its sales to justify the effort involved and generate a return on the activities?
That’s why Gross profit is one of the most important parts of any business financial report. Without enough gross profit, the business will not be able to sustain the fixed costs (overheads) of running the business or give sufficient return to the investors in the business.
How does your business measure up?
Here’s a checklist to help you determine how well you are monitoring and managing your gross profits.
- We set annual and monthly gross profit goals and we assess our progress against those goals on a regular (at least monthly) basis.
- We know the overall level of sales we must make to achieve our profit goal.
- We know what is the average cost of materials or goods purchased for resale relative to revenue.
- We know what unit volumes are required to be produced to achieve our targeted sales.
- We know the labour resources required to achieve production volume targets.
- We know what is the true cost of direct labour per unit produced.
- We know what gross profit will be made by our individual product or service groups.
- We know the ideal mix of products/services to achieve the highest level of gross profit.
- We have the physical capacity to produce the targeted volumes.
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