What Is Your Real Gross Margin Number?

gross profit margin

Did you notice any trends with your gross margin when working through your numbers from 2021? We work closely with independent appliance dealers in multiple markets across the U.S., and we have started to see a trend ourselves that uncovers a bigger conversation about GMs. Consider this insight when determining the real GM number for your business.

Where is the line that shows your true GM?

Before we answer this question, let’s discuss the more pertinent truth that every business owner must face – what is the GM that keeps the bills paid? It doesn’t matter if you have a good GM in your own mind; what matters is whether you have a grasp on that dividing line, that GM line that keeps the lights on. That crucial line will define your company’s future.

Success is not cash on hand.

Set aside conversations about investments and stop measuring your success by how much cash you have on hand. Cash on hand is important and credit lines are critical, but they should not be the benchmarks or those lines of demarcation that define your success. You need to be intentional with the GM number you operate under. 

Don’t let salespeople control your GM.

The GM that keeps the lights on is important because it is the line of demarcation between a valuable sale and a worthless one. Do you control the final price for the client? If not, then change that. Salespeople can be your biggest problem if you let them determine your final profit margin. 

What GM number do you need to have a healthy net profit? 

Your net profit is fully dictated by your GM. Your GM should reflect a formula for success that is your creation, but how do you get there? First, meet with your accountant or your bookkeeper and work backwards on a formula. Consider what the ideal GM is for your company. 

You will likely find that the GM you need is 10% or more above paying every bill and expense on time. To achieve this, you may need to restructure your business. If so, consider changing key relationships with builders and clients, dropping unprofitable vendors, or establishing minimum GMs that salespeople must achieve. 

These are just a few of the factors to consider when determining your actual GM. At Riley & You, marketing and the related services we offer represent our deliverables, but creating great marketing is a given and not our endgame. Our endgame is to drive profitable business to you and to help structure an executable sales model so that your business can thrive. 

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