Do you know the true cost of your gross margin?
Posted on behalf of Stuart Siegel, Cornerstone Solutions
When it comes to finding out the true cost of doing business, many builders are surprised by what their actual gross margin figures are.
When was the last time you did a deep analysis of the gross margin at your project, lot, or plan level? Do you know what numbers you need to make an accurate assessment? Are you meeting your margin goals defined in your original proforma? In this three part series, we look at:
• Why you need accurate gross margin data
• What are the key milestones for gross margin calculation
• What external factors you need to consider
First, let’s start with the basics. What is gross margin?
It’s a company’s total sales revenue minus it’s cost of goods sold.
Simply put, it’s the money left over from the sale price of a home after you’ve paid all the bills to build and sell it.
Why you need accurate gross margin data
There’s no denying that when the market is up and the homes are being sold faster than you can build them, it’s easy to overlook the less than fun job of statistical and financial analysis. So as long as there’s money in the bank at the end of each month, you must be making a profit, right? Well, yes. But are you maximizing your profits and meeting your financial goals and objectives?
The more I work with builders digging deeper into their data and financials, the quicker we find that most of them are not making anywhere near as much money as they thought they were. In an upmarket, the volume of homes sold will usually handle the shortfall. But this masks weaknesses and shortcomings in underlying processes, and not addressing those issues is leaving money on the table. When the market turns the problem is compounded as you suddenly find yourself struggling to pay the bills and your tradestaff.
Having a sound understanding of how to accurately calculate your gross margin is essential for making the most of the good times and being able to ride out the bad. The good news is that all it takes is accessing and analyze your data at specific milestone events in your build and sales cycles.