Welcome back to the Growth Podcast Series inside Her CEO Journey. Over the last few weeks, starting from Episode 164 to 172, we share the puzzle pieces you need to grow a sustainable and profitable business. But none of these strategies matters unless you as a founders is ready to understand the financial numbers of your business.
We are not talking about many numbers; only one number matters. And this one number can tell you if you are growing a sustainable and profitable business. You’re listening to Her CEO Journey, the business finance podcast for mission-driven women entrepreneurs. I’m your host, Christina Sjahli.
If you are new here, a big, warm welcome. If we are not connected on LinkedIn, please reach out and say hi because that’s where I hang out and share my business finance tips. If you have been listening to this podcast for a while and you are a regular listener, I want you to know I appreciate you. My podcast won’t be around without your support. This is a free weekly show where my guests and I want to inspire you to balance between mission and profit to create an impact in this world and to achieve financial equality through your business for good.
As mission-driven founders who are busy scaling your business, unfortunately, like it or not, you still need to understand your financial numbers. No other option. But we will make it simple for you. In this solo episode, we will share with you one number and by understanding this one number, you will quickly find out where is the problem.
The one number that matters to you and your business is called the gross margin. So what is a gross margin, and how can you calculate your gross margin? Most importantly, once you calculate it, what can this number tell you about your business’s financial health?
What is Gross Margin?
Gross margin is a simple formula of revenue minus the cost of goods sold. Your cost of goods sold is the cost of delivering your service or product. And from this simple formula, you want to calculate the gross margin percentage simply by taking the result of revenue minus the cost of goods sold divided by revenue.
If your profit and loss statement is structured correctly in your accounting system, you don’t even need this formula because the profit and loss will show you what is your gross margin. It can be easily identified. Once you calculate the gross margin percentage, then what is this percentage really telling you? Now, if your gross margin is 30% or lower, it tells you two possible issues.
If your gross margin is 30% or lower, it tells you two possible issues. Number one is your pricing. Your pricing is likely incorrect. Number two, your cost of goods sold is either too high or too low. A higher cost of goods sold, if it’s not matched with higher pricing, then it can result in a gross margin percentage lower than 30%. Now the opposite is also true. A lower cost of goods sold can mean you have not identified all the direct costs needed to serve your customers or to create your product.
Hence, your pricing is also incorrect. If you are interested to learn more about pricing directly from other women founders, find the Pricing Series inside Her CEO Journey, which starts in Episode 160. Another option for you is to connect with the Profit Reimagined team, and our fractional CFO can help you figure out if the issue with your gross margin is related to pricing or related to your cost of goods sold. Connect with us at the profitreimagined.com/letschat.
And that brings us to the end of another episode.