What Happens When the Gross Profit Margin Is High?

I’m always happy to pass on great info...and this is great info! I’ve included a few snippets below lifted from the full article.

Turning a juicy profit is a worthy goal, and it starts with the gross profit margins you earn on the products or services you sell. Gross margins aren't the only or even the main indicator of your company's health, though. All things being equal, you want your gross margins to be good, but don't let them lull you into thinking you're bulletproof.

Mostly, It's a Good Thing

Except for a few specific cases – nonprofits, obviously, or businesses you run at a loss to offset your profits somewhere else – turning a profit is the main point of running a business. That's what covers your payroll and pays the bills. It's what gives you the resources to keep growing, and at some point down the road, it's what will make your company attractive when you want to sell out and retire. That said, if your gross margins are high, it just means your production costs are reasonable relative to the selling price of your product. It's possible to have excellent gross margins and still face some challenges.

It's Not the Only Thing

All things being equal, it's good to have high gross profit margins, but even a moment's thought shows that it's not the ideal way to measure performance. If you don't sell enough of your product or service to cover the bills, for example, it doesn't matter how good your gross margins are. It's often more useful to look at your net margins, which take into account all of the other expenses your business incurs outside of production costs: Taxes, operating expenses, salaries for nonproduction staff, and the cost of servicing your debts all come into play. If your sales are high enough, your costs low enough, and your margins good enough, your net profits or retained earnings will be positive. That's a more realistic measure of how well you're doing.

Do you need more detail on this subject? Head on over to the full article here for more ideas and perspective. Afterwards, why not drop me an email to share your thoughts [email protected]; or call me on (0429) 011-071.

To your success,

Ian