When Your Gross Profit Margin Speaks, Do You Listen?

Your gross profit margin is a critical financial metric as it directly impacts your overall income.  For most businesses, this number remains relatively constant from month to month.  By tracking it monthly, you can easily identify issues before they become major problems.

Whether your margin is higher OR lower than normal, it’s speaking to you.  It’s giving you a red flag that says something is different or possibly wrong.  Do you ignore it or assume it will fix itself next month? Or do you investigate by digging a litter deeper or asking questions?

Is Your Change In Gross Profit Margin Explainable?

If you implemented a price increase, without an increase in cost, then you should expect an increase in your profit margin.  No problem, it’s explainable.

There are other reasons why you may experience a one-time blip in your margins – up or down.  You may not always like it, but again, they are explainable.  You know why it happened.  For example,

• Did you have a few new customers with large sales, but lower than normal margins?
• Did you have an extra pay period that increased your direct labor costs?
• Did you need to purchase additional inventory or stock to meet a future need?

But you could also have lower gross profit margins because …

• Suppliers raised or changed prices and you haven’t passed it on to customers or built it into your estimates or quotes
• Quality issues caused work or jobs to be re-done or rejected
• Customers were billed improperly or not at all
• Supplier invoices for stock or materials were incorrect or paid twice
• Labor hours are higher while sales are declining; scheduling more people than needed
• Subcontractor costs were higher than you projected

These sometimes get ignored until they become obvious – your checking account is low on cash!   But the sooner you catch them, the sooner you can fix the problem.  So if you are not calculating or tracking GP margin, start now.

Related:  Markup vs. Margin:  The Difference Can Cost You

And when you uncover an issue, don’t ignore the red flags or band-aid the problem.  Fix it permanently by improving your systems and procedures – so it does not happen again and again.