GO TO THE MIDDLE


I have a different view of financial performance when looking at the Income Statement (P&L). There is too much focus on the top line and not where the company makes money. I go to the middle of the Income Statement to understand gross margin, the difference between revenue and what it costs to produce the revenue. No argument against growing sales, I just want to make certain the sales are profitable. And I want to know how money is being made. Are the gross margins typical for the industry? How can they be improved? Which products, services and customers are most profitable or least profitable?


The answers require a detailed analysis of product lines, customers and all the costs associated with generating the associated revenue, not just material and labor. What are the cost drivers? What are our gross margins by product and customer? The answers are always revealing, generally not expected, and provide the foundation to substantially increase profits and cash flow.


Driving more revenue to the top line makes the company appear to be growing. The focus should be on profit and cash flow. Are they both increasing with revenue? If not look to the middle and maximize both by driving gross margin growth.

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