By Sandra Taylor-Sawyer: Local columnist
Well, here it is the end of another month and whether a business has a bookkeeping service or their own computerized accounting program, chances are a profit and loss statement is available.
What should be done with it? Don’t just file it away. It’s a valuable tool and this is a good opportunity to analyze how the business is doing profit-wise.
First, look at gross profit. Gross profit is total revenue minus cost of goods and represents how much of each sales dollar remains after goods are paid. It is usually expressed as a percent of gross revenue and will vary depending on the type of business. The “quick turnover” type products tend to have lower gross margins while the reverse is true for relatively slow moving goods such as jewelry.
Gross margins that are lower than 50 percent, unless yearly revenues are over $200,000 or so, is a warning sign. However, there are exceptions to every rule. A low gross margin may mean several things: Products are priced too low, the price paid for the material is too high, or the product mix is featuring products with too high a cost rather than those a business can make more money on.