Staying on top of your company’s financial health at all times is essential. Here are three metrics to help you make more sound decisions while growing your business.
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Gross Margin Dollars & Gross Margin Percentage
Gross margin dollars show total profit generated by the sale of a product or service (the markup.) If your company buys a product for $20 and sells it for $30, you earn $10 in gross margin dollars through your $10 markup.
To determine your gross margin as a percentage of revenue, divide your total profit into your total revenue. If you buy a product for $100 and sell it for $150, your $50 in gross margin dollars is 33.3 percent of total revenue (your $50 profit is 1/3 the total sales price.) For every sales dollar, your company has approximately 33 cents to cover expenses.
Be aware that gross margin dollars can be deceptive. If you sell a product and earn $100 in gross margin dollars, you’d seem to do well. However, if you bought the item for $900 and sold it for $1000, your $100 would be only 10 percent of your gross margin as a percentage of revenue. If your company bought a product for $1 and sold it for $2, you’d earn a $1 profit but a 50 percent gross margin as percentage of revenue. Therefore, gross margin as a percentage of revenue shows a clearer picture of profits than gross margin dollars.
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Markup Percentage
Your markup percentage is your increase on the original selling price. Markup sales are shown as a percentage of increase so your company can earn a proper amount of gross or profit margin. Markups allow you to easily price items when you sell various products.
Your markup percentage calculation is cost times markup percentage, then added to original unit cost to find your sales price. If a product costs $100, your selling price with a 25 percent markup would be $125.
When utilizing the markup percentage to determine your prices, it’s hard to make sure you consider all your expenses. Be sure your markup is high enough to cover indirect costs.
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Operating Income (EBITDA)
Earnings before interest, taxes, depreciation, and amortization (EBITDA) is similar to net income with factors of non-operating expenses added into the value. Operating income is figured from a simpler math equation and is considered the same as earnings before interest and taxes.
Operating income is used more often than EBITDA because the calculation is simpler and more reliable. Accounting for different types of capital assets and adjusting for depreciation takes much time. Operating income is simply calculated by taking gross income and subtracting operating expenses and depreciation and amortization.
Know your company’s financial health at all times by using these metrics to help you make better decisions. For more assistance with saving your company money, contact Innovative Employee Solutions today!
