The Gross Profit Margin ratio is a very important profitabilty ratio used widely in all industries and businesses and it is very important to a small business owner like Jack Gordon because it gives him a very clear idea of what kind of cushion a small business has after it has paid for its cost of goods sold. This cushion is what determines the profitablity of a business and the next item that is subtracted from the Gross Profit to get to the operating income is of course the operating expenses. Thus having a good Gross Profit Margin ratio is critical to all small businesses like A Touch of Tuscany.
We can see in our analysis that we are looking at a fairly steady gross profit ratio of 65%, 66% and 67% for 2009, 2010 and 2011 respectively.What this means is that after the cost of goods sold has been accounted for, 65% of the total sales will be available to accommodate the operating expenses of the business. Gross profits are projected to be $964k, $1,008k and $1,075k in the three years and sales are projected tobe $1,455k, $1,528k and $1,075k respectively.
Clearly if sales were to come in lower than expected, our gross profit margins would be under pressure and we would have to keep a very tight lidon our operating expenses to ensure that our operating profit margin was healthy enough to pay the interest on our debt and the taxman for any dues.
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