Why is tracking your gross margin important?
What gets measured gets managed, and what gets managed gets improved. Tracking your Gross Margins per revenue stream will tell you if you are making money and through which revenue streams.
You will also be alerted to possible problems including incorrect estimating, poor execution and even incorrect ways of marking up your costs to achieve your prices.
Once you determine your Gross Margin goals, you need to set up systems to track progress toward your goals. In this e-newsletter, we will show you simple ways to set Gross Margin goals and how to track your Gross Margin.
- How to set up your Gross Margin goals
- Learn some simple ways to track your Gross Margin
How to Set Up Your Gross Margin Goals
Start with adding up all of your overhead costs including your indirect costs and your SGA costs (Sales, General and Administration). You can take these numbers directly from your financials or Profit and Loss statement.
Here are the key costs that would typically be included in Indirect Expenses:
- Indirect Salaries i.e., field supervisors, account managers, client reps,
mechanics, sales, vacations/holidays
- Auto and Equipment including: equipment maintenance, field, and auto,
equipment rental, gas, and oil
- Other Indirect costs including: dump fees, bonds/permits, yard, and office rent,
hand tools, uniforms, and laundry
Here are the key costs that would typically be included as GA Expenses:
- Professional services
- Taxes and licenses
- Travel and entertainment
- Advertising and promotion
- Salaries: owner, officers, purchasing, office, and accounting
Add your total Indirect and SGA costs and you have your total overhead cost
What is your total Overhead costs in dollars? $ _________
What is your total Overhead costs as a percentage of revenue? _____ %
Now that your total Overhead costs have been calculated, what is the needed Gross Margin to cover these costs in $ ___________ (your breakeven point) and % of total revenue ______ %
What additional Gross Margin would be needed to make a fair net profit?
Tracking Your Gross Margins
- Start with setting the overall combined Gross Margin goal for the company both in dollars and as a percentage of revenue.
- Now set Gross Margin goals for each revenue stream that represents 10% or more of total revenue. Note: When all of these are added up, these Gross Margin goals should equal your overall Gross Margin goal for the company.
- Track your revenue by streams and by direct costs, actuals vs. projected.
- Track the maintenance labor costs weekly and the extra work installs and trees daily.