When gross margin slips, it is rarely one dramatic event. It is usually several small leaks that add up. Here are four worth checking.
1. Discounts and credit notes
Discounts given to close a sale and credit notes issued later reduce the price you actually earned. If they are recorded in different places, the true net price is hard to see. Compare the invoice price with the net price after all adjustments, by customer.
2. Rising input cost not passed on
If raw material or purchase prices move and selling prices do not, margin falls even though sales look steady. Track purchase price by item over time and compare with the selling price trend.
3. Product and customer mix
Selling more of a low-margin product can raise sales and lower margin at the same time. Look at margin by product and by customer, not only in total.
4. Wastage, returns and stock differences
Scrap, breakage, returns and differences between book and physical stock all sit in cost of goods. They are easy to ignore because each one is small.
An average margin hides where the margin is made and lost. Break it down before you try to fix it.
A monthly view that shows margin by product, customer and cost element turns a vague feeling that profit is lower into a short list of specific things to act on.