What KPIs to Watch to Keep Gross Margins High

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Business-163501Waiting until the accountants give you a financial statement for the current month is not an option for a business owner who is focused on keeping margins high.  They know that gross margins are made up of many factors and all of them are subject to change at any moment.

Your customers may have shifted their buying patterns, buying products with a lower profit margin.  Your suppliers may have increased prices.  Your sales staff may hit their sales goals by increasing discounts.  But no matter the reason, the sooner you discover it, the quicker you can protect your profit margins.

Smart business owners do this by getting daily (or at least weekly) KPI reports.  KPI stands for Key Performance Indicators.  These are quick snapshots of reasonably easy-to-measure items that accurately indicate the status of important business operations.

Since a KPI is designed to give early warning of changes to gross margin, you must first calculate some benchmarks.  Some common ones are:

  • Product mix percentages by major category
  • Gross margins by major category and for top-selling products
  • Average price for top-selling products (use the 80/20 rule)
  • Average cost of major products purchased
  • Average discount for major products sold
  • Total labor hours to produce and deliver major products
  • Percentage of returned products by major product category
  • Percentage of internal errors by product category

Once you have determined what KPIs you should track, the next step is to get your accounting program and/or department to provide you with only the numbers you need in the simplest and most condensed form possible.  You don’t need to be an accountant, but you must know how to use the numbers.  It is well worth hiring an accountant/CPA with experience designing KPIs.

The goal is to notice margin-reducing trends early and correct the problems before you have a bad quarter or year.