Vita's Tip In 10: Why Is Gross Margin So Important

Hello, hello, friend! Welcome back to another episode of Vita's Tip in 10. In today's episode, I want to circle back to a topic we touched on last week – gross margins. It's a critical aspect of your window treatment business, and I want to dive deeper into why calculating and maintaining healthy gross margins, ideally between 55% and 65%, is paramount. Before we dive in, a quick reminder to check out episode number 748 of A Well-Designed Business podcast, a Window Treatment Friday episode where LuAnn and I explored the nuances of calculating margins and the differences between margin and markup. Now, let's get into why gross margin matters so much.

At its core, the main reason for running a business is to be as profitable as possible. That's the endgame. We want our businesses to thrive, support our lifestyle, contribute to society, and perhaps most importantly, provide for our families. However, I want to shift our focus from overall profitability to a specific and crucial aspect – gross margin.

Just to refresh, what is gross margin? It's your revenue minus the cost of goods sold (COGS). If you're a shop-at-home window treatment specialist, think of it this way: for a $1,000 retail order, the COGS includes the cost of blinds, fabric, trim, hardware, fabrication, installation, and any other direct costs associated with fulfilling that order. If your COGS is, let's say, $400, your gross margin is the difference, which in this case, is $600. So why is this $600 so significant?

Now, this $600, or gross profit, is usually expressed as a percentage – in this case, it's 60%. And here's why these percentages matter so much.

They level the playing field between businesses of different sizes. Whether your revenue is $200,000 or $5 million, the percentages tell us how profitable each business is compared to the other. So, a smaller business might have the same percentage in gross margin as a multimillion-dollar business. It's about efficiency and profitability, not just sheer size.

Let's go back to the $1,000 order example. The 60% gross margin means that $600 out of every $1,000 goes towards running the overall business, after covering all costs associated with that order. To simplify even further, for every $10 in revenue, $6 is allocated to operating the business.

Now, you might be wondering, what exactly are these operating costs? The most significant is usually payroll, whether it's just you or a team working for you. Beyond that, there are operating costs like marketing, advertising, insurance, vehicle maintenance, softwares you use, consulting services (bookkeeping, CPA, attorney), gas for your car, office supplies, education you decide to invest in, utilities, and rent, even if you're using part of your home for your business. These are some of the the expenses necessary for the business to function and deliver services to clients.

This is why maintaining a healthy gross margin is crucial. It ensures there's enough profit left over after covering the cost of goods sold to run a healthy business. If your gross margin is, say, only 25%, even 4?% it's a red flag. It indicates that there might not be enough financial cushion for your business to sustain itself for the long term.

The higher your gross margin, the better your business's likelihood not just to survive - it allows it to thrive. It means you can afford to hire new team members, provide bonuses, have a nice showroom or location, engage in charitable work, or even take a larger portion of the proceeds for yourself. It gives you the freedom to do what you want with your business's resources.

So, in our window treatment business, a healthy gross margin falls between 55% and 65%. This range provides the flexibility and freedom to operate at optimal levels. If your margin falls outside this range, it's time to take action. You can either increase your prices, thereby increasing revenue while keeping costs steady, or decrease your cost of goods sold while maintaining the same revenue. Ideally, you can work on both to boost your gross margin percentages.

Now, how does all this translate to your everyday business practices? The next time you put together an estimate, ensure that every component – whether it's hard goods, motorization, hardware, or fabric – contributes to a gross margin of around 60%. This isn't just a goal; it's a tangible action you can take daily. Make it a routine, a practice, a discipline. With that 60% gross margin, you create a healthy cushion to ensure your business runs smoothly – from covering payroll to handling basic bills and still having enough left over for bonuses and net income.

I know we've delved into financials and understanding the numbers before, and today's episode focuses specifically on gross margins. I hope this sheds light on why it's so crucial and what it empowers you to do. So, whether you're a solo operator or running a team, remember that your gross margin is your financial backbone, providing the stability and freedom to make your business thrive.

That's it for today's episode of Vita’s Tip in 10! If you're hungry for more insights into financials, mindset shifts, CEO strategies, or digital project management tools, I've got you covered.

You can join my Systems Driven Operations class at LuAnn University – registration opens in November – or opt for my VIP Experience, a two-day in-person intensive where I share all my systems for immediate implementation in your business. There are only a few openings left this year, and prices will be going up in 2024. If you've been contemplating this, now is the time to lock in the 2023 prices.

Reach out, and let's schedule a conversation. Meanwhile, I'll be working on my next episode of Vita’s Tip in 10. See you next Thursday, and remember, keep thriving and keep growing! Thanks for tuning in!