Profit is the vital factor in every company — it opens many avenues of expansion and contributes to the solution of almost all problems. SIMMS 2012 Inventory Management software helps you manage your profits by revealing your business’ gross profit margin.
A company’s gross profit margin is an assessment its efficiency in securing overall profit once the expenses of the cost of goods sold have been deducted. A higher GPM is more encouraging for the company — and any investors — in regard to its future earning potential. The control of overhead (including rent or mortgages, utilities, etc.) is crucial to a company trying to improve its GPM. The formula for its calculation is as follows:
GPM = Gross Profit ÷ Total Revenue
For illustration purposes, let’s calculate the gross profit margin of Company One based on numbers from its income statement:
$180,000.00 gross profit ÷ $420,000.00 total revenue = 0.42
Therefore, the gross profit margin for Company One is 42%, which is very good.
Several areas in which a company can improve its GMP are as follows:
1) Reduction of Administration Costs – management personnel overhead is the concern here. Again, the work done versus the expense to achieve the work is the ratio to be used here.
2) Reduction of Cost of Sales – there are expenses related to the sales of products or services, and can be reduced by selection of a less expensive labor force or purchase of less expensive materials.
3) Reduction of Debt – this can be done through finding and employing lower interest charges and any other structured financial advantages that can be achieved.
4) Reduction of Development and Research expenses – this should be rolled back to its level of return efficiency. Many businesses accept expenses here in the belief that speculation works best, but it should be based on returns from each separate project and its revenue generating potential.
5) Reduction of Effects of Depreciating Stock – Newer, more reliable items must be purchased and older pieces must be converted in any way possible to a minimum of what was spent to acquire them.
6) Reduction of Marketing Expenses – either a lowering or discontinuation of aspects currently employed toward advertising.