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If your firm takes orders up front on purchase orders and works off a sales order backlog, track the estimated gross profit estimated on these future jobs. Tracked over time, this overall weighted gross profit percentage will tell you if sales are becoming more profitable or declining in profit value. There are things to consider for both results.

Increasing gross profit margin percentages:

• This is favorable for your future income statement profitability and cash flow.
• Watch to ensure the percentage is not stemming from only one customer or a very small group of customers which cover up other problem accounts.
• Check to ensure the gross profit margins are correct and all costs are included in the estimates.
• Are there new customers in this backlog? How are their margins compared to the rest of the group? Higher or lower?
• Is one profitable customer an overwhelming part of the backlog causing this GP to be high? What is the GP% if you take out this customer?
• If the GP % variance between the highest and lowest customer is small, this is good. If the variance is wide, check pricing decisions. Who is making pricing decisions and are they based upon knowledge or fear or upon what some incentive-motived salesperson said would win the job. Note: This is another reason to make sure you pay your salespeople from gross profit margin data and not sales revenue.  Sales really do not mean anything.  Profit means everything.

Decreasing gross profit margin percentages:

• This is unfavorable for your future income statement profitability and cash flow.
• Why is the gross margin estimated percentage declining?
• What high margin jobs are gone?
• What low margin jobs are now in the backlog? Why were they bid low?
• What is the variance between the best and lowest GP % customer?
• What new low margin customer has been added to the backlog?
• The troublesome lower gross profit margin may stem from a specific customer, but from new group of products that is going to be evaluated for the company. Without these items, is the GP % the same or better than in the past?
• You want to know the gross profit margin percentage is declining so you can affect future orders that are accepted by the company.
• At the point you know the gross profit margin percentage is dropping, force all prices that are bid are reviewed before going out the door or being emailed.

Automate your backlog gross profit margin reports.  Instruct your IT personnel to design reports that summarize your sales order backlog by customer, month, product type or whatever sort that is more applicable to your firm.

Suggestions for Estimated Gross Profit Margin Reports:

• Profitable Customers? Which customers are generating the best GP%s? Note: Remember, high margin customers do not necessarily know they are high margin so always give them high margin treatment in all aspects of doing business with your firm.
• Unprofitable Customers? Worst GP%s? Note:  Remember that low margin customers do not know you made a mistake and priced them too low or allowed their costs to be too high. Do not treat them badly, just cut costs, encourage them to buy higher margin items and politely raise their products.
• Best Products? Which product lines or services are generating the best GP%s?
• Worst Products? Worst GP%s? Note:  Who in your organization is looking at this? Cut costs, improve product, change marketing, drop offering?
• Future Losers? Which customers are projecting declining GP%s?  Make sure to tell the sales rep that his commissions are declining over the next few months unless he does something about it.
• Future Gainers? Which customers are projecting improving GP%s?  Make sure to tell these sales reps they will be making a lot more money over the next few months.  They will thank you and you will have given them the encouragement they need to land more great contracts.
• Winning Sales Reps? Which sales reps are generating the highest GP%s? Tell the reps they will be making more money.
• Losing Sales Reps? Which sales reps are generating the lowest GP%s? Note: If you pay reps on gross profit, this problem begins to solve itself.
• Estimators? Which estimator is generating the worst GP%s?  Whoever this is, begin reviewing their bids to ensure consistency in your bidding approach, especially new hires. Note: You might consider putting the estimators on an incentive plan that pays them from gross profit (higher prices, higher margins, lower prices, lower margins, lower paychecks.)

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