Maximizing Profitability: The Importance of Tracking KPIs to Maintain High Gross Margins

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Maximizing Profitability: The Importance of Tracking KPIs to Maintain High Gross Margins

It’s astonishing how many businesses generating significant revenue have little understanding of their actual profits. Some may only review their earnings at the end of the month, quarter, or even year. This approach is not sustainable if you want to maintain high gross margins. 

The most successful business owners track daily and weekly key performance indicators (KPIs) to spot trends and address issues promptly, preventing small problems from escalating into major financial setbacks.

Start by Identifying the Right KPIs for Your Business

The first step in effective KPI tracking is to identify the indicators that are most relevant to your business. While there are numerous KPIs you could monitor, some commonly tracked ones include:

  • Product Mix Percentages by Major Product Category
  • Gross Margins by Major Product Category or Top-Selling Products
  • Average Price for Top-Selling Products
  • Average Cost of Major Products Purchased
  • Average Discount for Major Products Sold
  • Total Hours of Labor to Produce Major Products
  • Percentage of Returned Items by Major Product Category
  • Percentage of Customer Mistakes by Major Product Category

These are just examples. Your KPIs should be tailored to your specific business and industry. For instance, car dealerships might track metrics such as the number of test drives, proposals requested, deals closed, and extended warranties sold.

Collaborate with Your Accounting Department

Once you’ve determined the key KPIs for your business, collaborate with your accounting department to obtain these figures in a clear, concise format. For example, at Coca-Cola, we provided a daily report that included both daily and monthly KPIs, offering management a comprehensive view of the company’s performance.

While your accountants handle the technical aggregation of these figures, your role is to interpret the data and take necessary actions. Consider hiring an accountant skilled in designing custom reports if you don’t already have one.

The Advantage of Proactive KPI Tracking

Tracking KPIs allows you to be proactive rather than reactive. For example, one of my clients nearly lost a major customer accounting for significant sales and gross profit. Because their business made about $4 million in sales, the loss wasn’t immediately noticeable. 

However, by regularly tracking their KPIs, they identified a drop in sales in this category and investigated the issue promptly. They discovered that the customer’s new purchasing agent was favoring friends, and by addressing the issue quickly, they retained the customer.

If they had waited until the end of the year to review their numbers, they likely would have lost that customer permanently. This example underscores the importance of staying on top of your business’s numbers. Regular KPI tracking enables you to act swiftly and effectively to maintain high gross margins and ensure long-term profitability.