There are thousands of books on how to grow your business, run your business, be a good leader, be more productive, etc…. I know a lot of IT & Telecom solution providers that read all those, attend conferences, but still run their business by “the seat of their pants.”

This is understandable in our industry as many leaders come from a technological background. Tracking metrics and configuring profitability does not always come very easy. There are thousands of metrics that can be used to track and improve your business, and depending on what your challenges are, the use of these metrics will change over time.

If I had to pick one metric to start with and run a business by, it would be gross margin (also called gross profit margin). I use this to figure the profitability of projects, the profitability of clients, the profitability of different lines of services or products, and of course the profitability of the company.

Why do I like this? Well if you are not making money, then nothing else matters. A percentage over time is easier to process, for you and your employees. Additionally you can show your employees progress without showing them actual numbers.

The problem is most people that I have encountered, do their calculation wrong and end up with a gross profit margin percentage that is incorrect.  I have seen calculations that make it look like the company is doing great, but when the correct formula is used, the results are different. Here is the correct formula:

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Getting revenue variable should be easy. The COGS though, that is where the truth is revealed. Depending on what you are calculating, you might need to take into account things such as: equipment costs, shipping costs, subcontractor costs, fully burdened employee (i.e. technician) cost, sales commission, project management costs, travel costs, cost of supplies (even the small stuff), discounts, training costs, etc…

It might sound confusing, but an easy spreadsheet can be made in under an hour to easily “fill in the blank” to calculate your gross profit margin. Then take that number, for example if it is a client or the company, and focus on the operational efficiencies to improve it, or perhaps you need to think about re-pricing your services.

Over time you will need to drill into other metrics to solve certain inefficiencies, but ultimately, its all about making money.