Gross Margin Factor is very important for managing the finances of a company. We use this ratio all of the time in real life and do not realize it.
Pretend for a moment that your child/niece/nephew/neighbor is doing a fundraiser for his or her team. The wonderful people that came to introduce the fundraiser to them has given each of them a list of prizes they can earn by selling different volumes of the product or services. Also, there is a grand prize for the person who sells the most.
This scenario is a different way to look at the Gross Margin Factor. At the end of the fundraiser, they will count all of the money raised and then they will separate it all into the volume that each boy or girl sold and stack them next to each other. Each pile becomes a percentage of the total sales, with the target being to find the highest percentage.
With Gross Margin, the total is all of the sales, but instead of looking for the highest percentage, we are instead looking for one specific pile–the Gross Profit pile. This would be like looking specifically for little Suzy’s pile rather than just the highest pile. Once you have found Suzy’s pile, then you can compare it to the others and see if she won or not.
In the business world, little Suzy’s pile is the Gross Profit. The other piles would be the Cost of Goods Sold and together the piles make up the total sales for the company. Clearly you are going to want the profit to be as high as possible to keep your company healthy.
Your business THRIVES on a solid Foundation!