Gross Margin Analysis:

The analysis tips here will help make that clearer.  Yellow Belt

 Definitions

The three main terms you will be dealing with here are:

Income:
Also called Revenue.

Cost of Goods Sold (COGS):  
Also called Variable Costs and Cost of Sales.

Gross Margin: 
Also called Gross Profit.

Income – COGS = Gross Profit

Analysis 1: Cost Category Changes

Do you have historical accounting data from previous accounting periods?

Look for changes in each of the Variable Cost categories between accounting periods.

Typical categories are:

Example:
Calculate a ratio of a cost category e.g. labour to revenue.

Year 1:
Revenue = $1,000 and
Labour = $100

The ratio is Cost/Revenue:
$100/$1,000= 10%.

Year 2:
The Revenue and Labour figures give you a ratio of 20%.

Consider why labour has gone up:

When you have multiple possibilities like this, the 12Faces article 5 Why’s Problem Solving Technique can be useful to work out what happened.

The Cost/Revenue ratio approach:

Analysis 2: Gross Margin Ratio

Gross Margin is:

Above, we discussed differences in each of the categories, not the overall relationship.

The Gross Margin Ratio:

To calculate:

Example:

Figures last year were:
$200 Gross Profit / $1,000 Income = 20% Gross Margin.

Figures this year:
$100 Gross Profit / $1,200 Income = 8.3% Gross Margin.

The Gross Margin Ratio has fallen from 20% to 8.3%.

We can see this is true:

Some of the likely changes may be:

Income increased and Gross Margin increased:

Income increased and Gross Margin fell:

Income fell and Gross Margin rose:

Income fell and Gross Margin fell:

Future Proofing

If this analysis turns up anything of interest:

Suggestion:
Develop “Modules” within a “DashBoard” that let you keep an eye on your business.
You are already familiar with the role of a car dashboard and this acts in the same way.

Further reading on this topic at the article: Interpreting The 12Faces DashBoard

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