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!
As I sat listening to Joe Woodard (google his name, he is THE go to person for all things QuickBooks), I heard his predictions about the future of QuickBooks and became very excited.
There is a competition looming on the horizon that is perhaps one of the biggest competitions in business that I have seen in my lifetime. This competition revolves around the successful implementation of an online business platform.
You may ask how there could be room in the cloud for such a large development considering how well the internet and SaaS have expanded. The best explanation I can give is to reference Google.
Google is a great example of an attempt at a platform. Google is somewhat like the developer that puts together the beautiful mall.They do not sell anything. They do not offer solutions, they merely offer the real estate that people flock to for their internet searches, socializing, posting of pictures and documents, managing email and calendar, hosting websites, and on, and on, and on.
What resource offers that same solution for small businesses? Yup, no one. This is the open space that Intuit is driving toward with QuickBooks Online. This is the prime real estate that is still up for grabs despite QBO’s head start. Who will become the Google platform of the business world?
Click below here to see our profile on Thumbtack.
I am frequently questioned about whether a person hired can be paid by as a sub-contractor or as an employee. My answer is usually the same advice I was given when I was the individual being hired as the sub-contractor: the employer bears the majority of the burden and liability.
Should a sub-contractor become injured or angry during his employment, there are many benefits that he or she is not privy to as a sub-contractor like worker’s compensation and federal withholding. There are many fines and penalties the employer is subject to if certain policies are not upholded that clarify the relationship as a sub-contractor.
ADP has done a good job of laying out the details on this topic in this link: 1099 vs. W-2 Other
This ratio is another ratio that is beneficial to track over a period of time. More important than the number is the change of the number over a period of time.
If the number drops quite quickly, it indicates either a rapid loss in sales, which would need to be analyzed, or it means that several new employees have been brought on recently.
Just as the change is more important than the number, so also is the explanation more important than the change. There is no reason to panic about a dramatic drop in the number if there is a good explanation. It is not going to be very likely that you will be unaware of a change in workforce or a drop in sales, so those make easy explanations and you will likely have a plan in place to improve those things. Just be aware of the small changes too–the unexpected things that tell a story you did not already know.
Also keep in mind that an increase is not always a good thing either. You can decrease your sales for the month and still increase this ratio by reducing your workforce. Again, know the story behind the changes.
This ratio can be used for targets as well. You may decide that you do not want to exceed a certain change in the number because then that means you have too few employees to handle customer service or production. In this case, you would set a max number for this ratio and make decisions to hire based on that ratio.
Always remember, when you have an explanation for the changes, you know how to handle the growth or reduction so keep an eye out for the unexpected changes.
Your business THRIVES on a solid FOUNDATION…
Since the time of the interview, I have joined the accounting firm of Piercy, Bowler, Taylor and Kern and I continue to offer the same services through them.
I was recently interviewed on a podcast (online radio show) and wanted to share this with you on my website. You can listen to the podcast below or read the transcript.
In order to build a successful business, you need to make smart decisions. In order to make smart decisions, you need to have proper data to base your decisions on. While you can use your gut to make decisions, having an accurate and reliable data will lead to more successful results.
In this episode, we’re speaking with Jeremy Lott about how to make better business decisions using proper accounting systems.
Jeremy is an accountant and QuickBooks ProAdvisor. He works with business owners that want to be able to use QuickBooks to help them make their most difficult business decisions, increase profit, and improve cash flow.
For more information about how Jeremy can help you, visit Foundationbookkeeping.com
This equation, similar to the Revenue per Square Foot equation, is quite simple.
NET REVENUE/# OF EMPLOYEES
So by using the methods discussed in the Understanding Ratios posts, we know that we want the Net Revenue to be the winner and that we are looking at the results from the point of view of the employees. So a higher number is better.
But what is a good number? We will discuss that in the next post.
Your business THRIVES on a solid FOUNDATION!!!
If you were in a little rowboat with a leak in it, you would be quite happy to have a bucket. The most pressing question you may have would be how many times you had to fill that bucket in order to keep your boat from sinking.
This scenario relates to the Sales per Employee ratio. Either because the business owner is quite wise and realizes and plans for bringing on help, or because the business owner is sinking in the water filled boat and screams for anyone to come help, businesses bring on employees as the workload expands.
Hiring new employees is like adding buckets and hands to help bail out the boat. The important point is to make sure that you are not bringing on too many buckets.
A good way to determine if the number of employees you have is appropriate for your business is to use the Sales per Employee ratio. By using this ratio, you can make sure that your workforce increases with your sales so that you do not end up with too many buckets bailing in the boat and not enough waterr to go around.
I will go over the equation in my next post.
Your Business THRIVES on a Solid FOUNDATION!!!
There are many different ways that the Revenue to Space Ratio can be beneficial. I will mention two of them here–a retail store and in making decisions about new spaces.
Anytime that you are selling in your store or office this ratio is useful. You may be a retail or wholesale store or even a salon or a professional office practicing law, medicine, accounting or the like. In any of these situations, it is important to know your Revenue to Space Ratio.
The second scenario that benefits from this ratio is when you are considering a move to a new office. Will the new space produce new revenue? If so, will it also increase the Revenue to Space Ratio? Is the increase in cost worth the move? This ratio can be used to determine the answers to those questions.
Additionally you may be deciding to downsize. If you downsize, will your Revenue to Space Ratio increase? You should be able to answer ‘Yes’ to these questions or the move may not be worthwhile.
Regardless of the situation, the underlying theme is always an assessment of how the size of your space affects your sales and if a different space would be more suitable.
Your business THRIVES on a solid (and appropriately sized) FOUNDATION!!!
As you very well may have guessed, the equation for Revenue to Space is:
Revenue/Total Square Feet of Office
This can also be used for warehouses, plants, etc.
The result will be dollars per square foot and will give you an idea of the earning power of each square foot of space. Keep in mind that this is a sales ratio and other similar ratios will be discussed in future blogs.
Naturally, a higher amount per square foot is preferable. If you have questions on how to determine if the number is favorable or not, you can always check out the blog on understanding ratios.
There are several applications for this ratio and I will discuss them in the next post.
Your business THRIVES on a solid FOUNDATION!