Hi I'm Gareth Pronovost and in this video I'm talking about gross margin,
specifically how it pertains to the small business owner and entrepreneur
Now gross margin is sometimes thought of as a KPI - other people consider it a
financial metric - personally I don't care how you categorize it, so long as you are
considering it and using it in your business decisions. Gross margins is one
of those calculations that if used correctly can really help you grow your
business more profitably and more quickly. So in this video I'm going to be
talking about a quick definition of gross margin, then I'm going to give my
top three tips for using gross margin in your business, and then lastly make sure
to stay tuned until the end because I'm going to jump into Excel and show you
how to get a visualization of this metric for your business.
Welcome to Entrepreneurship by the Numbers, where we help unlock the
potential of your business with data-driven metrics.
Okay first we have to define Gross Margin.
Gross margin is calculated by your gross profit divided
by your revenues in the same period of time
now gross profit is the first profitability metric that we look at in
finance and accounting and the only costs that are being subtracted to get
to gross profit are those cost of sales or cost of goods sold and those are the
costs that are directly related to producing your product or service so all
of your overhead expenses and your operating expenses those are going to be
subtracted out later the reason that we look only at those costs of sales or
cost of goods sold is because those are the ones that have the biggest impact on
your profitability so looking at gross margin first and foremost tells you how
well you're doing and how efficiently your operating as a company.
Alright tip number one when using gross margin always start from a consolidated viewpoint
most businesses have multiple revenue streams or multiple locations
and things can get a little muddy but you always want to start looking at your
gross margin percent in terms of company-wide and later we'll drill into
the other sections but your first stop is always looking at it and just saying
how as a whole did we do in this time period now right that takes us to tip
number two tip number two is always look at your gross margin on a drill down
after you've reviewed the consolidated so if you have multiple revenue streams
you want to look and check what the gross margin was for each of those
revenue streams or check what the gross margin is for each of your different
stores or locations that you might have there are a lot of ways that you can
increase profitability within your company by doing this if you see one
store that's more profitable than others you can use some cross training and
start employing tactics that that one store uses in order to help the whole
company become more profitable similarly if you have multiple revenue streams and
you see that one revenue stream is particularly profitable you can start to
sell more of that revenue stream and it will bring up your overall company
average all right tip number three when we look at gross margin always look at
it over a period of time gross margin just by itself - like in a vacuum - doesn't
mean a whole lot it doesn't give us a ton of information what we really want
to do when we're tracking different KPIs - gross margin included - is track it over
time to say are we better this month and last month or this week then last week
and if so what did we do and if not what did we do
alright so always track your KPIs over time that way it gives you some some
relevance so that you can tell if things are going up or the other way all right
so quick recap start from a consolidated view point then be able to drill down
into your specific divisions or store locations or revenue streams and then
always always look at gross margin over time as with all KPIs all right as
promised we have now jumped into Excel and we are gonna throw together a really
quick way to visualize your gross margin as you track it over time now for this
simple example I am just looking at month revenue and cost of goods sold and
we're going to assume that there's only one product line or stream revenue
stream for this company so these are the only pieces of data you're
need in order to track gross margin percent because gross margin percent if
you remember is your gross profit divided by your revenue so to get two
gross profit you just take revenue and you subtract
the cost of goods sold now that we have gross profit in this part we're gonna
divide gross profit by revenue to get our gross margin and magic happens and
we have the entire table already filled out now I don't want it in just a
decimal I'm gonna swap this over to a percentage like so and now now that you
have the gross margin just select that entire table and you click insert come
over here to the line graphs and select the line graph now you'll notice that
originally it's going to include all of the data streams from this
table that we have built so we don't care for this purpose about revenue and
cost of goods sold so right click on the graph come down to select data and we're
going to remove the revenue and we're going to remove the cost of goods sold
and now you'll see that this graph is only looking at the gross margin and it
really clearly illustrates exactly what's happening to this gross margin
over time and the reason that this is so powerful is decisions happened in March
that started to cause the gross margin to dip and we can see that quite clearly
by tracking gross margin on a regular basis we are able to course-correct
very quickly and get the company back on track to a growing profitability and so
please if nothing else is taken from this whole video please do start using
gross margin at least at a consolidated view and track it over time so that you
can make sure to avoid pitfalls like this as you grow your business all right
I hope that was helpful as always be sure to click Subscribe if you enjoy
this kind of content and don't want to miss out on future videos and in the
meantime best of luck as you continue to grow your empire thank you
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