Deciphering the Gross Profit for a Business - dummies

Deciphering the Gross Profit for a Business

Business owners must carefully watch and decipher their gross profit trends on monthly income statements. Gross profit trends that appear lower from one month to the next can mean one of two things: Sales revenue is down, or Cost of Goods Sold is up.

If revenue is down month-to-month, you may need to quickly figure out why and fix the problem in order to meet your sales goals for the year. Or, by examining sales figures for the same month in previous years, you may determine that the drop is just a normal sales slowdown given the time of year and isn’t cause to hit the panic button.

If the downward trend isn’t normal, it may be a sign that a competitor’s successfully drawing customers away from your business, or it may indicate that customers are dissatisfied with some aspect of the products or services you supply. Preparing a monthly income statement helps you to quickly find and fix a problem, thereby minimizing any negative hit to your yearly profits.

The other key element of Gross Profit — Costs of Goods Sold — can also be a big factor in a downward profit trend. For example, if the amount you spend to purchase products that you then sell goes up, your Gross Profit goes down. As a business owner, you need to do one of five things if the costs of goods sold are reducing your Gross Profit:

  • Find a new supplier who can provide the goods cheaper.

  • Increase your prices as long as you won’t lose sales because of the increase.

  • Find a way to increase your volume of sales so that you can sell more products and meet your annual profit goals.

  • Find a way to reduce other expenses to offset the additional product costs.

  • Accept the fact that your annual profit will be lower than expected.

The sooner you find out that you have a problem with costs, the faster you can find a solution and minimize any reduction in your annual profit goals.