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?
Review your business against this best practice benchmark now
BEST PRACTICE BENCHMARK: We have annual and monthly target Gross Profit goals that we work towards each month and throughout the year. #financial-management
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.
About the SMART-Connect best practice financial management advisor
Financial Management Advisor and CFO
Robin Snelling is a Virtual Chief Financial Officer or CFO, with 40 years of corporate and small business experience. He’s passionate about creating reports which reveal the guts of the business – which sections are inefficient, what product groups are most profitable, what sales channels are performing, which customer markets give the best return.
Robin is a founding member of the Association of Virtual CFOs, which has the goal of promoting the benefits of this relatively new industry to SMBs.
Robin is currently working on the development of Informer 4 SMB software, a unique cloud solution which provides automated financial analysis of profitability and cash requirements for SMBs. This software will make management reporting far more accessible to SMBs