Core Viability Check: The Gross Profit Margin Routine
Why This Routine Matters
Gross Profit Margin is the most fundamental indicator of whether your core business model works.
It tells you, before considering rent, salaries, and other overheads, how much profit you make on every dollar of sales. If this number is consistently too low or falling, it means your product pricing or production costs are fundamentally broken. This routine ensures you maintain the power to cover your fixed costs and stay in business.
The price of your inputs (e.g. raw materials, products for resale) and the labour wages required to manage the direct supply of your product or service that increase with your revenue are almost certain to rise over time. You adjust for this steady rise in costs by increasing your price. But, it is easy to forget to do this so your profit is slowly nibbled away. Use the GPM to track when a price change is needed.
Monitoring Frequency
Quarterly: Perform this routine in the first 1-2 weeks after the end of the quarter.
Monthly (Recommended): If you are frequently adjusting pricing or supplier costs, monitor monthly.
Ratio 1: Gross Profit Margin (GPM)
This ratio measures the profitability of your goods or services after subtracting the direct costs required to produce them.
Step 1: Calculate Your Gross Profit Margin
A. Find the Inputs
Net Sales: Total revenue minus any discounts or returns for the quarter. (Found on your Income Statement).
Gross Profit: Net Sales minus Cost of Goods Sold (COGS) for the quarter. (Found on your Income Statement).
B. Calculation
Example: If Gross Profit is $60,000 and Net Sales are $100,000 the GPM is $60,000 / $100,000 * 100 = 60%
Step 2: Interpretation and Trend Analysis
| Result & Interpretation | Action Trigger | Trend Analysis |
| High GPM (GOOD): Varies by industry (e.g., 50%+ for services, 25%+ for retail). | Maintain: You have strong pricing power or efficient production. | Look for a Rising GPM. This is a Positive Trend—your pricing or efficiency is improving. |
| Low GPM (WARNING): Below your industry average or your historical average. | Immediate Action Required: You are likely losing money or struggling to cover overheads. | Look for a Falling GPM. This is a Negative Trend—your COGS is growing faster than your revenue. |
Step 3: Remedial Actions (Fixing Core Profitability)
If your GPM is falling or is significantly below your target, implement one or more of these remedial actions:
Adjust Pricing Strategy:
Action: Immediately test a price increase on your lowest-GPM products or services.
Action: Re-evaluate your hourly rates or project fees to ensure they account for all direct labor costs.
Reduce Cost of Goods Sold (COGS):
Action: Negotiate better bulk pricing with your primary suppliers (a Sprint Task).
Action: Review your production process for waste or unnecessary direct labor hours.
Turn this into a Routine
We want to make this a regular Routine for your business in order to ensure your financials stay healthy.
This sort of Routine lends itself to a simple spreadsheet so you can;
- calculate the results for the selected period
- see at a glance if the results are improving or worsening over time
- take any remedial action required and monitor if that works
If you are familiar with spreadsheets, you can automatically insert so-called ‘Traffic lights” by colour coding Bad (red), Watch (yellow) and OK (green) to instantly catch your attention if results change. See our template spreadsheet that does all this
This article was provided by Scott Williams AO FAIDC. It describes the way best practice in many management areas has been brought together in the 12Faces GamePlan System. The Goal is to provide an easy to use and repeatable “flywheel” to improve small business owners’ outcomes. Scott is the Founder of NFP small business support services 12Faces and MentorSME and has a Philanthropic Foundation supporting students in education. Scott’s business Petals Network was National Small Business of the Year and 4 times in the Top 100 Fastest Growing Australian Businesses LinkedIn