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Few calculations in your business plan are more important than gross margins. Get this vital percentage right, and you can sail off into the sunset of success. Get it wrong, and even your best-laid plans will begin to unravel.
But gross margins aren’t only relevant to your business beginnings. They can also help you to track company health in the long run.In fact, you could argue that gross margins are a little like an all-round health check for your company. Like a clear blood test, good gross margins can reveal internal strength and general business well-being. Equally, flatlining gross margins can highlight a fading company pulse, and that’s not the only thing.
Keep on reading to find out about the other company health warning signs that could be hiding just behind your current gross margins.
# 1 – Declining Margin Trends
Each time you use a margin calculator, you ideally want to see an upward trajectory, or at least a steady performance. But if that line is nosediving like a struggling heart monitor, then it’s time too take note.
Admittedly, you needn’t declare your company dead after one slightly shaky gross margin performance. But a consistent drop over consecutive periods is definitely something to worry about. Most concerningly, these kinds of ongoing issues can point to problems at the core of your profitability.
That sounds worrying, but think of it like a potentially fatal diagnosis caught early. Because gross margin oversight has alerted you to the issue, you can start treatments that might include complete financial or product-based breakdowns to highlight the problem. Then, effective treatment won’t be far behind.
# 2 – Cash Flow Strain
Sometimes, you can be in trouble even if your overall profits are on the rise, especially if you’re falling behind on loan payments or are relying too heavily on avenues of credit. It’s easy to miss these signs of cash flow strain at a glance or by considering profits alone, but they’ll be glaringly obvious in your gross margins as averages decline regardless of performance.
If you suspect this issue, it’s vital to take immediate action, including working out where you’re hemorrhaging the most money, and what you can do about that. Improved financial management, or paying loans in lump sums as soon as profits allow, can help your business to stay far healthier.
# 3 – Product Problems
Just as X-ray machines can pick out the smallest broken bones, gross margins can also highlight product problems at a granular level, such as a poor product mix that sees you overspending on your less profitable items or under-ordering the items in demand.
Luckily, this is the easiest issue to overcome, as it enables you to see firsthand how to effectively handle your inventory with sales in mind. Like a plaster cast, it also highlights which products you should be putting out there to see the fastest return to financial health possible.
Gross margins matter at every stage, and seeing them as a kind of company health check could be the best way to address these common problems.
