Given the new economic reality, almost every business owner I know is searching for ways to save money, however, saving money is the eye of the beholder. Business owners, entrepreneurs and developers have different views when it comes to saving and spending. One personâ€™s saving is another personâ€™s spending.
If you find yourself frustrated, although your business seems to be doing well, but your profits do not match your set expectations, you might experience money hermitage in various areas within your business operation. Reviewing your financialsâ€™ income and expenses can shed some light on your bottom line.
Let us look at a one aspect that often is disregarded when reviewing your financial statements: Gross Margin and pricing.
The most vital aspect of every business whether small or large, is GROSS MARGIN. It is the percentage resulting in Revenue minus Cost of goods sold, or your costs directly associated with the sale of service or product. This figure is extremely important because it has a direct effect on your breakeven and the profit beyond the breakeven.
For example, if your revenue is 300,000 and your COGS are 150,000, you have 50% to manage your fixed expenses such as advertising, payroll/professional fees, rent and utilities. The 50% Gross Margin can indicate how efficiently your company uses its resources. The higher the gross margin the better the company thought to control its costs.
How do you control gross margin? Setting a competitive pricing for your product and services is not an easy task.
In order to set up a profit goal you must determine your breakeven point per unit or what you must charge in order to produce a product or a service. If your price per unit is $10 and your cost to produce such a unit is $6, your breakeven point is $6 or 60% and the gross margin (profit) is 40%. The calculations get interesting, however, when you take your fixed costs divided by the 40% in order to determine number of units to sell in order to break even. In order to make a profit then, you might find a cheaper supplier or sell at a higher price to yield a higher profit.
As you can see, the gross margin has a tremendous effect on the financial health of your company and your profit.
Yvetta Busha has 30 years of corporate and small business upper management experience in the financial and accounting sectors, along with a strong knowledge of both cash and accrual accounting systems, enabling her to oversee all aspects of financial forecasting, resource allocation, fund management, accounting and control. She is an expert in investment tax laws and payroll, remains current in Federal and State Tax Laws, and is a Quickbooks ProAdvisor. Contact Yvette at firstname.lastname@example.org.