Companies require capital to invest in people, products, systems, etc. Companies can make more cash or take on outside investment capital to boost growth. In either case, gross margin plays a key role.
Gross Margin is calculated as gross profit/net sales – it is essentially a measure of how much money your company has left over after all the direct costs it takes to produce your product. So, why is a healthy Gross Margin important? Here are a few reasons:
It will allow you to spend on brand building and new product development. The more gross profit you have the more you can invest in strategies that support your ongoing growth.
You will have more room to make mistakes along the way. It’s inevitable that not everything you do as a company will be a success. Having high gross margins will give the extra cash you need to protect the firm from crisis mode. Thin margins leave little room for this.
Investors are not interested in funding losses. There's nothing an investor hates more than dumping equity capital into a company to fund losses at the gross margin level. Why? Funding at this level is not creating value. Typically, investors look for companies that have gross margins at least as strong as their peer group/competition.
Improving your gross margin is difficult. To improve margins companies are either reducing their cost of production or passing their cost to customers (through price increases). It can be difficult to make these changes without your customers noticing. Well executed plans to reduce cost of goods, careful evaluation of your pricing to evaluate where it may be possible to increase pricing and readjusting your sales mix to focus more on the most profitable products are a few areas to think about.
Ultimately, strong gross margins will help you continue to have the ability to invest in growth. It will allow you to leverage additional growth capital, leave room to make mistakes or reinvest in growth initiatives.