Tag Archives | gross profit margin percentage

Should You Pay Attention to Economic Indicators?

An article published recently in the Journal makes the case that smaller companies should pay attention to certain economic indicators, such as the Producer Price Index (PPI), unemployment rates, and consumer confidence. Yet most smaller companies take what the market will bear, and sell and buy in markets which are impacted by much more narrow factors than the general economic environment. Not to mention that many of these indicators are lagging indicators rather than leading.

Should You Pay Attention to Economic Indicators?

Not that looking for signs of what’s to come is necessarily without value for your business. What I took from the article is that it is important to know what drives your business. Also, it is important to review the pricing of your products and/or services, as well as that of your vendors.

Still, it is worth your while to know how your company makes money. Which factors drive your earnings? How does operational performance connect with your profitability? Knowing the economics of your business is important in improving your profits and cash flow. What is your gross profit margin percentage? How much can you increase profits through a price increase versus through an improvement in productivity? Perhaps once you know your P&L statement inside and out and maximize the factors that impact that the most will it be worthwhile to consider the indicators that the popular business press bombard us with abandon.

If you want to find out more about how you could utilize your unit economics to add more value, then click here to download the Know Your Economics Worksheet.

economic indicators

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economic indicators

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Margin Versus Mark-Up

Communicating simple accounting and finance measures to colleagues can be a challenge. Take, for example, gross profit margin percentage and mark-up percentage or simply margin versus mark-up. To non-finance professionals, these two measures may seem to be interchangeable. But they’re not. Mark-up percentage is generally a marketing measure used in pricing decisions made by marketing professionals. Financial professionals use gross profit margin percentage as a measure when reviewing a company’s income statement.

Margin Versus Mark-Up

Calculate mark-up percentage by dividing a product’s unit cost by the gross profit. You get gross profit by subtracting a product’s unit cost from its sales price and assuming that cost reflects COGS on a per unit basis. Gross profit margin percentage is when you divide the amount of gross profit by sales on the income statement. Compute it on a per unit basis. So the primary difference between the two percentage calculations lies in whether gross profit is divided by cost or by sales. Differences may also exist due to the product costing method you use to determine the cost per unit sold.

It may be helpful to explain to non-finance managers the impact of a prospective price increase in terms of gross profit margin percentage. Then leave out the mark-up measure altogether.

Margin Versus Mark-Up

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