Gross Margin is an excellent yard stick of business and its mirrors the effectiveness of the management team. Gross Margin is the difference between the selling price and cost of the of the product (before fixed expenses). The brute message is keep pusing up the selling price while keeping your direct raw material and direct fixed costs (selling & manufacturing costs) at the lowest possible. If gross margins drop then alarm bells should start ringing and action should be immediately initiated either to correct selling price or reduce direct fixed costs. Failure to act with determination and speed will lead to erosion of profits and in the long run losses. Sales people will resist increase in selling prices and purchase people will resist brining down prices from vendors as it means lot of extra work for them, but we accountants being the watchdog of groos margins should keep on shouting from the roof top to both sales & purchase so that gross margins do not slip away to dangerous levels. Usually in most of the manufacturing companies gross margins are sacrificed when considering higher sales at lower costs this will have a ripple effect when there is a bad patch in sales like in the period from 3rd Quarter of 2008 to till date in 2009. Now sales have dropped significantly and if gross margin is also low nothing can be done about it at the moment and there will be a double effect of lower sales and lower gross margin meaning thereby lower profits and higher related problems - including problems in cashflow.
I would equate gross margin to the way ants save for their winter. Let us keep gross margin levels even in goods years and do not sacrifice the same for sake of sales. Gross margin is within our control, whereas sales may not be within our control as there are many external factors.
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