Your gross profit and business decisions

There are so many needed, powerful and insightful business decisions you need to make. You can’t do that unless you know some key financial numbers. Gross profit is one of them.

What sort of decisions, let’s list a few

• Break even. How much you need to sell to cover costs, meet your financial targets, your safety cushion.
• How much you should charge your customers? Pricing your products and services. In addition, pricing and gross profit go hand in hand.
• Outsourcing decisions. Should you or shouldn’t you. Cost versus benefits, the numbers side needs, you guessed it….
• Controlling and managing costs. Better margins come from increasing your selling price, reducing waste, improving processes, better buying.
• Cash flows. Stronger gross profits equals stronger cash flows

Listen to find out more

You manage what your measure.

Let’s get serious. If you don’t go digital, embrace cloud accounting then running your business just became a whole lot harder.

If you’re serious about your business, and don’t see it as a hobby then go cloud. The tedium, cost, and inefficiency of alternatives is too painful to think about.

FREE online calculators

Most of us want to sell more, make more profit, who wouldn't ?

Knowing what your costs, mark ups and margins are, and need to be is one way.

Our FREE profit calculator shows you what gross profit you are making now. What gross profit you could make if you altered selling price and costs.

We have other FREE profit and business calculators for you to use. Type in your numbers and see what the numbers show for your business.

Conclusion

Why Gross Profit is a big deal for your Business for all the reasons listed above. Ignore it at your peril.

The podcast is part of my mission to help you get closer to your numbers, to appreciate the power of what those numbers can do. Improve your money mindset, help you make more profits, save taxes, and help you have the business you want and deserve. Get in touch with us to see how we can help you with your accounting and business needs.

Subscribe so you do not miss an episode of I Hate Numbers. For more business and finance, news, advice and tips

 In This Episode

• Appreciating that your business health needs a financial barometer
• Being aware that pricing strategies, what to charge is tied in with your gross profit
• Understanding how to calculate gross profit
• Learning about key business information and decisions
• Tips to improve your margin.
• Developing your own Numbers confidence and decisions
• Take more control of your numbers to help make you money, survive and thrive.

Links

https://podcasts.apple.com/podcast/proactiveresolutionss-podcast/id1500471288

https://play.google.com/music/m/I3pvpztpjvjw6yrw2kctmtyckam?t=I_Hate_Numbers

https://open.spotify.com/show/5lKjqgbYaxnIAoTeK0zins

https://www.stitcher.com/podcast/proactiveresolutionss-podcast

https://tunein.com/podcasts/Business–Economics-Podcasts/I-Hate-Numbers-p1298505/

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Making a profit in your business is vital. It's absolutely essential that in your business planning, in your end goals, that you set profit as one of your primary objectives. That might sound like the statement of the obvious, bit like it's saying the sun rises and the sunsets, but it's absolutely key that you dial in making a profit. Now, not just making a profit.

In this particular broadcast, I'm going to be focusing on a particular profit called gross profit. Now, gross doesn't mean unpleasant or disgusting, even though having a rubbish GP is not good for your business. Hi folks. My name is Mahmood. I'm the host of the weekly podcast I Hate Numbers. I'm an accountant by qualification, and also I run my own accounting business and I run a training company.

Those two companies operate in the world of numbers, operate in the world of finance. I'm absolutely proud and chuffed to be an accountant, and even though your eyes might be rolling over, saying, oh my God, there's another accountant on the airways, my mission here is to improve your money mindset. Make sure that you make money in your business, and by money I mean profit that you have a good lifestyle,

you save time, you save tax, and have the business that you deserve to have. Now, in this episode of I Hate Numbers part of my mission to achieve that money mindset and improving your business, I'm going to be focusing on gross profit. Well, particularly what it actually is, why it's such a big deal, what we can do once we understand what our gross profit is, the power from pricing, decision making, lots of things.

We talked about breakeven in a previous episode, and how we measure and manage your gross profit. And obviously I'm going to be sharing some tips as we go along, and I've got a nice little freebie for you, which I'll talk about at the end of the episode. Obviously, dive into the show notes and it's all there for you to see.

I'd love it if you could subscribe to this episode and the podcast. Tell your friends, tell your family. The more subscribers we can have, then the more we can spread the message out. Okay, let's crack on with the podcast. Now, first of all, let's have a look at what gross profit actually is, and always the best way to look at these things is to think about an example.

Now, let's assume we've got a business selling secondhand trainers online, and they decide to sell those trainers at a hundred pound per pop. Now, if our business owner, let's call them Jovan, sells 20 of those pairs, he'll make two grand worth of sales. Congratulations, Jovan. That's pretty good going.

Unfortunately, that will not be Jovan's profit. What he needs to do, he needs to go out and buy, clean those trainers. Well, I hope he does anyway before he sells them on. Let's say for an argument's sake, that it costs Jovan 40 pounds a pair to buy in and clean those trainers. That means now, Jovan is making 60 pounds for each pair of trainers he sells.

That sets a good healthy profit at 1200 pounds. The 40 pounds is his cost, 60 pounds is his profit he's making on his trainers. Now, let's dip into other business sectors. So, if your business is in the hospitality business, selling food and drink, the difference between what you make a meal for what you buy in your drinks for and sell onto your customers is your gross profit.

If you are in the service sector selling courses, the difference between what you charge your clients, and the venue hire, materials will be your gross profit. If you're a manufacturer, making things,then the product selling price minus the cost to you of making those items, the cost of materials, the cost of labor, for example, the cost of the manufacturing overhead will be your gross profit.

Now, by the way, ask people in the world of finance and numbers, love to have alternative terminology. So, if you hear the phrase gross margin, it's pretty much the same thing. And that's another piece of terminology to share with you on this jargon-free show is that the cost of buying in those things like trainers, food, room hire, materials, all those costs that are linked with these sales easily is called cost of sales.

Now, if you're thinking, by the way, oh, this is going to be a lot of number crunching here, and I'll give you a bit of a spoiler alert here. We've got a free online calculator for you to plug into that'll do the calculations for you, and there's more that we'll get from the calculator. More of that later on in the episode.

Now, having seen what gross profit actually is, why is it such a big deal? Well, there are many reasons why gross profit is a big deal for your business. Now, firstly, it's one of the most important financial barometers to check the health of your business. Every time you sell something, your bucket of money builds up.

Now, this bucket, you've then got to pay for your running costs in your business, which includes, by the way, paying yourself. Typically, these items such as rent, the wages you pay to yourself, or your advertising costs, or your website-based costs are called fixed expenses. Now, once you've covered your fixed costs, then you're left with a net profit.

Now, why it's such a big deal, why it's an important barometer? If, for example, your gross profit drops, and that could be because the cost of making things, the cost of buying materials goes up, you make less gross profit and your break even points will drop accordingly. And when I say drops, that means you've got to sell more in order to stand still.

Your margin of safety, which is a safety cushion, gets worse, and therefore, that's not very good. And by the way, folks, if you want to check out previous podcast episode, we've covered break even, and there’s a beautiful free online break even calculator for you to use. Now, secondly, gross profit is an assessment tool, so it sees how efficient your business is in using your staff team to make that product, deliver the service, materials, manufacturing costs,

and it's a metric, it's a real key metric, or what we might call a KPI. Now, this KPI is also linked to the other type of cost that you may have, and these are ones that go up and down to your business activities. Again, check out previous podcast episodes where we've looked at cost behavior. Now, we haven't finished yet in terms of why gross profit is such a big deal.

Well, we also use it very widely in making decisions in business. So, when you come to make decisions in your business, like how much should I charge a customer? How much should I price my products at? How much should I charge my services? Well, pricing and gross profit go hand in hand. Pricing strategies about when it comes to outsourcing,

so if you decide there's something you are doing, whether it's making a product or you think about outsourcing, using your gross margin to make the evaluation is a very powerful tool. Sometimes products don't make the money that you want them to. Services that you offer consume lots of energy and time, and cost you money,

so dropping products, looking at business opportunities, even sacking clients are just a few examples of applying gross profit in your decision making. Now, I mentioned pricing earlier on, so let's have a recap before we dive into pricing. So, we've talked about what gross profit actually is. We've dipped our toe into the water as to why gross profit is such a big deal.

We've talked about the many decisions that we can make. We've talked about that financial barometer. Now, let's have a look at gross profit or profit margin in the application of the world of pricing. Now, most of us want to sell more products. Who doesn't? Make more profit - why not? And knowing what your costs are, your markup and margins,

is one way to approach that. Now, for those of you listening, thinking, what on Earth is Mahmood talking about markup and what's this margin? Let me summarise what those two approaches are. Now, in some sectors retailing in particular, somebody will take the cost of what it's to them of buying in the product or making the product, and add something to that cost to give them their selling price.

That's called a markup. Some people, again, in the hospitality sector, manufacturing, will look at their gross profit. And look at it, what it is in relation to the price they sell it at, and that's called the margin. It's the same cash profit, but it's just expressed in slightly different ways. So, pricing is still fundamentally based on adding something to the cost of the product or going by what the market says, coming up with what you consider to be a good margin for your product.

Now, we'll be revisiting pricing while particularly in next week's podcast, so subscribe. Make sure you don't miss the episode, and we'll come back to that in more detail. Now, there's even more about the power of gross profit. A good gross profit gives you much healthier cash flows. It gives you a direct relationship with the prices you're selling, and the healthier your gross profit, then the healthier your cash flows are, and that means the healthier your business will be.

Now, lastly, I want to look at the actual continual measuring your gross profit and actually managing it. Now, fundamental to any form of numbers that we deal with is actually having a good fit-for-purpose accounting system. Now for me, cloud and digital is a must have, not it will be nice to have one day.

So, that's where all your heavy lifting, all your data capture, recording what you are spending is done digitally, which cuts down the time that you spend on recording transactions, and with a bit of technology, a bit of human blending, then you will be able to capture that information and have an online system that tells you what's actually going on

under the bonnet. As I said on previous podcasts, if you rely on a bunch of spreadsheets which have their purpose and your accounts that are produced once a year to run your business, then you've got a tough challenge on your hands. Again, check the show notes out. I've got a link there to a free guide on cloud accounting called Release the Power in You. Recommend,

it's a read. Now, measuring is half the battle. Managing is the other half. So, if we go back to our earlier example, Jovan, he's selling his training shoes. Now, he wants to make more profit from selling those training shoes. He's got options. He can either charge more for the training shoes he's selling, always an option.

Obviously what we've got to consider is pushback from the clients and the customers who could spend less money. Look to drive down how much he spends on cleaning the trainers, how much he spends on buying those second-hand trainers in, and it's easier, not easy, for Jovan to control and manage those costs. In a hospitality business, if you look at maintaining a healthy gross margin, which is absolutely critical, then you can look at being efficient in the food preparation,

look for better procurement, less wastage. If you go into the world of manufacturing, when you look at the gross profit that you make on manufacturing, then again, you've got options. You can look to make efficiencies in the production process. You can look for better usage of materials, better utilisation of overheads.

All those options are available to you. Now, one question I have commonly get asked by people is, what is a good gross margin for our business? And in typical number style, it really depends on the sector that you inhabit. So, if you take something like the hospitality sector, if you have a blanket gross margin, typically you'd be looking at about an average 60 to 70%.

Now, if you drill down even deeper and your accounting systems enable you to do that, then on things like wines and spirits, your margin will be about 70 to 80%. If you go down to a draft beer for example, that can drop to lowest 50-55. In the world of manufacturing, manufactured products, I've dealt with clients who've got margins as low as 20%, which actually for their sector, for what they're doing is a good number.

So, really the key answer is, it depends on the sector you're in, and it depends on what you're benchmarking against. Ultimately, you want your gross profit to be one that allows you to cover your costs and give you a competitive and healthy business return. Okay guys, let's conclude where we are. Let's summarise.

So, we've looked at what gross profit is. We've talked about why it's such a big deal and it is a big deal. That gross profit is your bucket of money for which you cover all your costs. If you can't do that, then you won't have a business for much longer. We've talked about the applications of gross profit, these different areas, the different arenas from break even to pricing, to making decisions, which cover a whole variety of activities and events that will occur in your business.

We talked about how to measure and manage that gross profit, and I've mentioned, and I'm going to reinforce this now, about some bonuses, free online calculators that are linked in the show notes, which enables you to not only calculate your profit, but do a number of what if scenarios. So, it allows you to say, if I wanted to increase my gross profit and played around the costs and the selling prices, you know, what would the result be?

So, let that do the heavy lifting. Hope you got some value from the show. I'd love it if you could subscribe and encourage your friends and family to do likewise. If you've got any ideas for any future topics on the show, let me know what they are. If you've got any feedback to share, love to hear that.

Hopefully it's all positive, but if there's anything you'd like to see improved and added, I've inhabited the world of feedback for too many years to remember, so let us know. Apart from that, guys, get in touch to see if we can help you increase your profitability, access the world of resources that we've got. Until next week,

have a great week guys. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.