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E-Myth – “Why most small businesses don’t work & what to do about it”

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Accounting Outsourcing | Calculating Gross Margins

An entrepreneur will be able to gain a useful perspective on the profitability of their business says accounting Outsourcing. If they are able to calculate the gross margins of their business. This is incredibly important. Because it can help a business owner plan on what they need to do to increase the profitability of their business. Or generate more revenue for their business.

By putting the gross margins of their business into the executive summary of their business plan. Can help an entrepreneur understand what the profitability of their business is. Because it is such an important figure.

The first thing that entrepreneurs should understand is what the difference is between gross revenue, net income, and gross margin. These things are all related. But are calculated slightly differently. And are important for an entrepreneur to know. So that they can figure out if their business is profitable. And what they can do to change that if necessary.

The first thing that an entrepreneur should know is what their gross revenue is. This refers to the amount of money that an entrepreneur bills a client, and they pay. No expenses are deducted off this amount, not direct costs, and not overhead expenses either.

The next thing that an entrepreneur should understand says accounting Outsourcing is what their net income is. This is the amount of money that the business owner gets to keep after subtracting all of their expenses from the amount that they received from customers. This includes direct costs and overhead expenses.

Finally, the gross margin of a business reflects the revenue that an entrepreneur has minus the direct costs only. The direct costs specifically refer to the costs associated with producing that product or service. This means material costs, and labor whether they are staff members. Or hired contractors.

This is important to understand says accounting Outsourcing. So that’s a business owner can understand how much money they’re making per transaction. And how many more transactions they would need to have to reach a financial goal.

Or if they have to raise prices in order to ensure that their business is actually profitable. If an entrepreneur doesn’t know their gross margins. They might inadvertently be pricing their products or services to low. Or they might think that since they are covering the direct costs, that they’re making money when that’s not necessarily the case.

However, accounting Outsourcing cautions entrepreneurs that they don’t necessarily have to do a gross margin analysis on every single price point. For every single product that they offer in their business. While some businesses this is not an oh because they only have a few different products or services. So calculating per price point isn’t time-consuming.

But then there are other businesses, that offer such a wide variety of products and services. That not only is it’s time-consuming. But it doesn’t end up with an entrepreneur having better information on how profitable their business is. It’s far more effective for an entrepreneur to gain an understanding of how much money they typically will make per customer that walks through their door. Which means averages are going to work fine for most small businesses.

Calculating The Usefulness Of Accounting Outsourcing?

Understanding the profitability of a business is an extremely important thing for all business owners to know according to accounting Outsourcing. However, many entrepreneurs don’t know exactly how to calculate their gross margins. Or even what their gross margins are. Which impacts their ability to turn a profit, or reach a financial goal.

Calculating their gross margins can be an important way that an entrepreneur starts to understand if they are making money on each transaction. And if they are not, what do they have to do in order to increase their profitability.

It’s typically a matter of minimizing their expenses while raising their prices of it. In order to gain that profitability back. Which is why it’s important for a business owner to know how much money they make, and then how much money they make once all of their expenses are paid. Divided by the number of transactions so that they can get an average.

When an entrepreneur is calculating gross margins. Accounting Outsourcing recommends that they categorize all of the various transactions they have into different types. So that it can become a lot easier to take an average of all of their different transactions that calculates their profitability.

However, many entrepreneurs are not sure how to categorize their transaction types. Either not splitting them into types it all. Or trying to split them up into too many groups. For example, a restaurant owner might think that they need to have a transaction type for their beverages, their main courses, their desserts, and their appetizers. But that is not an efficient way to split transaction types says accounting Outsourcing.

Instead, a restaurant might want to consider splitting their transaction types into their catering side to their restaurant, the income generated from the restaurant itself, and the t-shirts that they sell with their logo on them. That is a much better way to reflect the different profitability of each transaction.

another example of this would be a contractor. They may one transaction type for all of their brand new builds that they do. Because there is a significant cost plus two significant time commitment to a brand new build. Whereas the second transaction type they might have would be for ongoing service work. Service work takes significantly last time and significantly less money. Which means it has completely different profitability. And requires its own transaction type.

Typically, accounting Outsourcing says that small businesses typically don’t have enough data points to make more transaction points important or even necessary. A large fast-food chain for example might have a lot to gain by understanding the exact cost of their french fries versus their onion rings. So they might have to raise their onion ring prices.

But then again, that fast-food chain is probably selling millions of orders of onion rings. And saving a few cents on that one small category. Can impact their bottom line significantly. Whereas for small business, they probably don’t care if they’re making money on their french fries or onion rings. As long as they are making money per customer that walks through their door.