Article On Fire

Examination of current gross profit percentages can indicate the need for pricing policy revisions to meet competition or closer attention to purchasing costs in order to provide extra gross profit without increasing prices.The evaluation of gross profit percentages requires comparison of current performance with three bases:

• Objectives originally set for the current year, if available
• Other businesses in the same industry
• Results of prior years

Comparison with objectives permits you to determine how well you have done compared with your original expectations. Deviations from objectives can quickly be identified and explored in detail to determine the cause of the deviation. 
Unfortunately, businesses are often too quick to dismiss the applicability of industry averages to their own operation, claiming that "Our circumstances are different". Such an attitude is self-defeating. A far more positive attitude is to say "If everyone else can realize a gross profit of x percent, then we should be able to".
Comparison of current operations with performance in prior periods permits detection of trends so that progress, or the lack of it, can be identified. For example, if your gross profit as a percentage of sales is low compared with the industry, analysis of your historical performance may reveal the cause of this apparent deficiency such as reliance on a major customer where severe competition restricts the available gorss profit percentage.