As a CPA, one of the key metrics you should be paying attention to for your clients is Gross Margin. Gross Margin helps you understand how much of your client’s revenue is left after covering the direct costs of producing their goods or services. It’s a crucial measure of operational efficiency and profitability, giving you insights into how well a business is managing its production costs. Let's dive into what this metric means, common issues to watch out for, and practical steps to improve it.
Gross Margin represents the percentage of revenue left over after subtracting the cost of goods sold (COGS). This remaining revenue is what's available to cover operating expenses, debt, and, hopefully, generate a profit.
Gross Margin Formula:
In simpler terms, Gross Margin tells you how much money the business keeps after covering the direct costs of production. A higher Gross Margin generally indicates that a company is efficiently producing its goods or services and keeping more of its revenue for other financial needs.
If your client’s Gross Margin is consistently lower than industry averages, that’s a sign there might be inefficiencies in their production process. Common causes include high labor costs, overpriced raw materials, or excessive overhead.
For instance, if the cost of goods sold is eating up most of the revenue, there may not be enough left to cover debt, operating expenses, or reinvestment in the business. A low Gross Margin could mean that your client’s prices are too low or that their production costs are too high—either of which needs to be addressed.
Gross Margin is a critical metric because it directly affects profitability. It shows how much revenue is available to manage other costs and, ultimately, how profitable a company can be. By improving Gross Margin, your clients will have more resources to pay off debts, invest in growth, and increase their bottom line.
For CPAs, helping clients improve their Gross Margin can have a significant financial impact—not only boosting your client’s financial health but also elevating your role as a trusted advisor who offers actionable, data-driven insights.
Improving Gross Margin requires analyzing various aspects of the production process and making adjustments where necessary. Here’s a workflow to guide your clients through optimizing this important metric:
Review Current Gross Margin
Analyze Cost of Goods Sold (COGS)
Negotiate with Suppliers
Optimize Labor Efficiency
Reassess Pricing Strategy
Monitor and Adjust
By improving Gross Margin, your clients will have more financial flexibility. They’ll be able to reinvest in their business, pay off debt faster, or improve profitability—all of which contribute to their long-term success. For CPAs, guiding your clients to better Gross Margins strengthens your advisory services, deepens client trust, and can lead to more referrals and business growth.
In summary, Gross Margin is a vital measure of a company’s operational efficiency and profitability. As a CPA, helping your clients optimize their Gross Margin ensures that they’re getting the most out of their revenue. By focusing on reducing COGS, optimizing labor, and adjusting pricing strategies, you can set them up for long-term financial health—while reinforcing your role as a key player in their success.
Peerview Data’s benchmarking and analytics tools take the guesswork out of improving Gross Margin. With real-time insights and industry comparisons, you can quickly identify areas for improvement and track progress over time. Let Peerview Data help you make data-driven decisions that lead to better financial outcomes for your clients.