Have you ever wondered why your Gross Profit Margin has such importance when analyzing the strength and performance of your funeral or cemetery business? It is a question that we receive quite often when working with our clients. Our Financial Analyst, Taylor Weber provides informative insights on this important element of your business analysis.
Question: Why is Gross Profit Margin important when Foresight performs their Strategic Performance Analysis for my business?
Taylor Weber: The Gross Profit Margin is one of the most significant measures for determining your business’s profitability and financial performance. Gross Profit Margin is defined as “a metric that analysts utilize to measure financial health by calculating the amount of money left over from total sales (or revenue) after subtracting the cost of goods sold (COGS) that is sometimes expressed as a percentage of total sales/revenue.” The general goal is to maximize the Gross Profit Margin because everything else—i.e. Operating Expenses—is now a subtraction from this point on an operating statement. Maintaining higher Gross Margins helps to produce higher profit margins if there is disciplined expense control.
Foresight analyzes Gross Profit Margin as a key performance indicator (KPI) in our Strategic Performance Analysis because it provides us with data points into whether any one of our clients are properly pricing their services and merchandise. There are two main factors that impact Gross Profit Margin. The first being volume—where if you serve more traditional cases requiring merchandise, then your COGS are expected to increase and thus decreasing Gross Profit Margin due to these two having an inverse relationship. The burial/cremation mix is the second factor—where serving more cremation cases yield a higher Gross Margin due to less merchandise being required and therefore having lower COGS.
When the Gross Margins are largely fluctuating between periods where there are more calls versus less calls, this is an indicator that a firm is not properly pricing their services and merchandise. This is important to note because pricing errors can create cash flow challenges and in the long term threaten ongoing operations.
Our goal is to help our clients maintain their Gross Margin as steadily as possible between 80%-89% depending on the demographics (where they are located) and what the mix is for their competitive market. Because the funeral business is already a relatively high, fixed-cost industry, beginning with higher Gross Margins versus lower Gross Margins, makes it slightly more “forgiving” for owners/operators when it comes to variable cost management. When the variable cost management is controlled along with higher Gross Margins, owners increase their likelihood of maximizing profitability or EBITDA.
Gross Profit Margin is important for us to include in our strategic performance analysis because it gives us key indicators of where we can continue to help our clients reach their goals from a financial standpoint.