If you want better results when growing your business, you’ve got to focus. In business, it seems that whatever we pay attention to gets results.
Today I want to focus our discussion on gross profit.
How Gross Profit Matters To Your Growing Business
Let’s spend a bit of time defining gross profit: revenues less cost of goods sold equals gross profit. The sales price of a good or service less the cost associated with its production is gross profit. In an over-simplified income statement.
Revenue
less: COGS
=Gross Profit
less: overhead
=Net Income
Here is another definition, the amount of money available after paying direct costs to cover overhead; and where it exceeds overhead to provide profit. By the way, profit is a good thing. If overhead is fairly fixed, once gross profit meets the overhead obligation, all gross profit dollars fall to profit.
Focusing On What Is Important To Grow Your Business
Gross profit percentage is really important and gross profit dollars are even more important. It is hard to spend a percentage. Many businesses seem to focus on overhead expense, and while it is important, it is generally the wrong place to focus much effort. In my experience, I rarely see a business with much available movement in overhead expense.
Focusing on gross profit yields the greatest benefit. Two ways of increasing gross profit;
- Increase revenue without a corresponding change in expense.
- Decrease the cost of goods sold. Or any combination of the two.
My experience is that many businesses are reticent to increase pricing, and by holding back they are restricting the opportunity to build a truly great business. Often too much emphasis is placed on the cost side instead of the revenue side.
Besides pricing other opportunities for revenue enhancement should be examined. What else could be of value to your existing and potential clients? Focus on enhancing gross profit dollars and you will be certain to obtain better results, increased profits, and increased enterprise value.
In our Catapult Groups CEO advisory boards we are focused on working with members to achieve better results through revenue enhancement, increase profits, and significant increases in overall enterprise value. For more information contact one of our business growth coaches at Catapult Groups.
