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Understand your Gross Margins

This is an area of much debate and there are different schools of thought that can be grouped into; people who run businesses and accountants. Understanding your Gross Margins is essential in running an effective business. To not understand them, often leads to financial ruin.

Understand every aspect of your gross margins. They are after all your only source of profit.

Challenge Everything. Do not accept any soft answers. If you are not sure what your reading, it is up to you to ask questions and find out.

Management Accounts. If you don't understand what's being presented to you in your management accounts, ask the questions and ask for all the supporting information.

Pricing. Gross Margins are used to determine what you charge your customers. It therefore stands to reason that these figures need to be accurate and that you understand them.

Overhead Recovery. Personally speaking, I don't like to see any form of overhead recovery used in your cost of sales. They lead to over or under recovery that quite simply, makes your management accounts too complex to understand.

Common definition. Make sure that the definition of Gross Margins is the same in all parts of the business. This sounds surprisingly simple, but in my experience, most businesses get this wrong. If in doubt, get your team together and find out.

Hourly Rates. In my view, your hourly rates should include direct pay, pension, and national insurance only. Any effective working, absence and sickness and all other paid time that doesn't generate profit should be classed as overheads and dead costs. By treating them this way, you will focus on reducing them.

Strategy. Finally, your business and product strategy are often determined from your perceived view of your Margins. If in doubt, say "show me" and find out for yourself.

Further reading,

10 ways to destroy a business

Top tips for Cash management

Top tips for an Operational Turnaround

Common causes of business failure

Key elements of a smart business turnaround

Why a quick fix is not the answer

Our Next Speaking Event

Date: 23rd May 2011
Time: 16:00 to 18:00
Location: The May Room at The Belmont Hotel, Leicester
Price: Free of charge

Stephen Moon and Rachel McCahill-Brown of The Smith Partnership will run through a case study identifying the pressures and issues facing businesses in today's current economic climate. This will highlight ways in which advisors can assist those businesses, and the issues and options available to them if the business cannot be turned around and formal insolvency looms.
To book your place, please E-mail Nikki



 IoD Mid-Summer Dinner

Date: 23rd June 2011
Time: 19:15 to 23:00
Venue: Mecure Brandon Hall Hotel, Brandon, Warwickshire CV8 3FW
Price: £35+VAT (£42) members and their guests £45+VAT (£54) non-members

Venturn are happy to be helping organise this special event. The IoD will be welcoming two speakers, the Right Honourable Eric Pickles, Secretary of State for Communities and Local Government and Dr Neville Bain, National Chairman, Institute of Directors. Eric Pickles was previously Chairman of the Conservative Party and is MP for Brentwood and Ongar in Essex. Dr Neville Bain's main career was with Cadbury Schweppes plc, he is the author of four books covering general management, governance and utilising people effectively. His latest publication The Effective Director, is about best practice in the boardroom.
To book your place, please email Sue Hurrell at the IoD West Midlands office