GP fluctuations? 5 reasons why
As business owners, you own the power of GP - that is, Gross Profit Margin. As business and financial consultants, we are passionate about how powerful GP is in driving up profitability, cashflow and business value.
Its formula is simple:
Gross Profit / Sales Revenue x 100% (expressed as a %)
Yet often it can be underappreciated in its value - whether inflated in one period, about right the next or always looking unrealistically low, here are 5 simple suggestions to arm you and your finance team with some of the tools to help identify those GP fluctuations:
Check the accuracy of your stock figure - sense check the accuracy of system calculations, quantities, or inaccuracies in cost prices of products. Maybe consider the timing of when the stock valuation report is run (e.g. too early). Keep on top of those slow-moving stock items and perform regular write-offs, or make regular provisions. Don't just leave it until the end of the financial year!
Has stock been received and booked onto the system, but no purchase invoice has been entered/received? This could be because the invoice is late or not entered for some other reason (such as in dispute) but must be included in the accounts as an accrued purchase.
Keep open communication lines between your Finance team and Operations department - purchase invoices/proforma invoices entered onto the system in finance, but stock not been booked on system/included in stock figures etc. in Ops. This could be because the invoice has been entered too early (i.e. stock not actually yet received) or stock is not being booked in quick enough and therefore timing issues occurring at the end of the period (e.g. deliveries not booked in on last day of month, and show on system as next month).
If you encounter the situation where sales invoices are raised in a different month to the stock being booked out of the system, expect to see a GP fluctuation. So if a sales invoice was raised on the last day of the month but not despatched/booked out until 1st/2nd day of the next month, this could be an issue. Alternatively, a deposit/up-front sales invoices raised quite a way in advance of the stock being delivered could cause discrepancies.
Are you a project-based business? Usually inaccurate WIP figures or timing issues in matching sales and purchases invoices in the same period can cause issues.
Reaffirm your understanding of GP% across all departments of your business to drive new and innovative behaviours. With sales the lifeblood and cash the oxygen, surely GP is your company’s food supply? Make it today’s priority to administer it with a well-deserved health check!