I often get asked the question, “Why is gross profit important? And why does it really matter?”
Well, first, let’s define gross profit. Gross profit in your business at the highest level, is the purest form of understanding whether or not the thing that you sell or the service that you sell, is, in fact generating a profit. Because the calculation of gross profit is the revenue that I generate minus the direct costs that are associated with generating that revenue. And those direct costs in your business are typically going to be labor, or they might be licenses and software, or they may be product.
Below that line of gross profit is the overhead or the apparatus of the business that is in service to supporting that gross margin.
Not enough business owners spend time optimizing gross profit. But can you imagine if your gross profit wasn’t 50% of revenue, but was 60% of revenue? How many additional dollars would be available for your organization to put toward investments in training and personnel and marketing and further infrastructure?
So if we spend a little bit more time understanding gross profit, we can then use the levers of understanding as a business leader to figure out how do we improve it.