Gross Margins & Benchmarks

Jun 07, 2016

I recently met with a client looking to purchase a manufacturing facility. He spoke about the gross margin of the facility and I was surprised by his comments.

First, he mentioned how shocked he was by the poor the margin which was 25%. I do not know about you, but for a manufacturer, this margin seemed decent. I know of manufacturers who operate with single-digit margins, and many who strive for 20%. Different industries have varying degrees of margins and the number can also be dependent on a company’s location within the world. It is not usually fair to cross compare margins. In this instance, the client did not know much about the given industry to have appropriate benchmarks. It is vital in any business to have benchmarks and set goals for your profit margin based on such data, If you are not realistic the goals are unattainable and will not be worthwhile.

Second, the client said he was very surprised to see factory employees insurance and other related expenses in COGS. In his mind, these were clearly part of G&A. Based on my experience, these are clearly COGS. I’m not sure why he believes otherwise.

As you can imagine, I am concerned about this client purchasing and attempting to manage such a facility. Hopefully, through coaching and expanding upon various costing principles, we will be able to achieve success. Do you or various leaders in your organization make such comments?

Managing your gross margin is essential. It’s an important part of any business, but particularly manufacturing. Do you know your organization’s financial benchmarks? Do you have a good handle on your true gross margin calculation?

Categories: Cost Accounting