Gross Margin is the linchpin that makes a business succeed or fail.
How many $ in sales do you need for every $ 1 of expenses. If your gross margin is 10 %, you need $ 10 in sales for every $ 1 of expenses. If your gross margin is 40 %, you need $ 2.50 in sales for every $ 1 of expenses.
If your break even goal is $20,000 in sales / month at 40 % margin. This would deliver $8,000 in gross profit. Suppose that with one week left in the month you have $10,000 at 40 % margin sold and the opportunity to take a job for $ 10,000 at 10 % margin. Would you take that job?
It would help you meet your sales your goal but you would actually fall short of your gross profit goal of 40 % or $8,000.
If you take the job you have $4,000 of profit from the first $10,000 sale and only $1,000 profit from the second job. So for the month you actually meet your sales goal but fall short of your break even profit goal by $3,000. If you do this for 5 months in a row you would actually lose $15,000.
This is a difficult concept for many businesses to understand, especially for a sales person.
People should focus on projects that meet their gross margin requirements and not be as worried with overall all sales $. If the gross margin is healthy and meets your requirements a business has the opportunity to be successful. If the gross margin is not healthy the business will eventually fail.
Hat tip to Norm Brodsky and The Knack