Even the Cost of Dirty Deeds Has Soared!
There’s nothing funny about inflation, but at least one business has kept its sense of humor. More importantly, they adjusted prices and set new expectations with their customers!
Kudos to The Cheese House American Diner in Omro, WI. I doubt they are really in the dirty deeds business, but their sign does raise questions every company leader should focus on:
How much do you raise prices?
How much margin can you afford to give away by not raising higher?
When will customers leave if you’re not “dirt cheap” anymore?
Which costs are going up the most?
Economic uncertainty is not going away, so stay on top of your numbers! This means looking at them a little deeper, more frequently, and in different ways. One of the most important things to know is what's going on with your gross profit margin. Unfortunately, a lot of accounting systems only show the first of two formulas involved:
Sales - Costs of Sales = Gross Profit $
Gross Profit / Sales = Gross Profit Margin %
Doing this for the last 5, 6, 8 months allows you to start with this picture of trended Gross Margin %.
Margin changes become obvious, but you still need to figure out "Why?" they change. Is it sales, costs, or a mix? In this example, we can conclude margins fell in Feb due to higher costs of sales. Prices were raised in April. Since then, margins are behaving a little, but still raise questions.
Keep in mind this is very high level. If you sell a wide variety of products, you will likely need to do this at multiple levels. And because margins reflect both sales and cost changes, we have to explore them separately. For example, costs include purchased materials, wages, and delivery, which will change at different times and rates.
Understanding Gross Margin is a key step toward understanding your overall profitability. If you need help, contact your accountant. Of course, you can also call The Data Magician!
