GROW YOUR BUSINESS

Many profit based organizations focus on their sales numbers when they should be more concerned with their gross margins on sales. The gross margin on sales is the difference between sales revenue and cost of goods sold (the price paid for inventory). The term gross indicates that the expenses necessary to operate the business must still be deducted to arrive at your bottom line. If the gross margin of sales is less than the operating expenses, the difference is a net loss for the period.

Let’s look at a simplified example: The XYZ Company purchases widgets for resell at $5.00 each. The sales staff sells these widgets to their clients for $8.00 a piece. This month, sales were $80,000 (10,000 widgets sold x $8.00 each widget). The cost of the widgets to XYZ Company is $50,000 (10,000 widgets purchased x $5.00 for each widget). XYZ Company’s gross margin on sales is $30,000 ($80,000 sales less $50,000 cost of sales). This means that their expenses cannot exceed $30,000 for the month if they want to stay profitable.

To stay profitable:

• Calculate your expenses for each month so you know how much gross margin on sales you need to cover them.
• Focus on how much you need to make on each sale and how many sales you need to stay in business.
• Selling fewer products for more money will give you more free time and less hassle.
• Make sure you only sell to clients who can afford to pay you.