Expert Workshop: Decoding Your Profit Margins for Smarter Business Decisions (Copy)
Most business owners calculate this wrong. (And it costs them.)
In September's financial workshop, Michelle tackled one of the most misunderstood yet critical aspects of business health: profit margins. But this wasn't your typical "here's how to calculate a percentage" session. This was about developing the financial literacy to decode what your numbers are actually telling you—and using that intelligence to drive smarter growth decisions.
If you've ever stared at your P&L and thought, "I have no idea if these numbers are good or bad," this workshop recap is for you.
What Makes Gross Margin Your Foundation
Michelle opened the workshop by addressing the most fundamental question every business owner should be able to answer: After I deliver my product or service, how much money is left to run the business and pay myself?
That's what gross margin reveals.
The formula is simple:
Gross Profit ÷ Total Revenue = Gross Margin
But here's where most business owners stumble: not every expense belongs in cost of goods sold (COGS).
The "No Sale, No Expense" Test
During the workshop, Michelle introduced a game-changing filter for categorizing expenses correctly:
If you didn't make a sale, would you still have this expense?
If yes, it's overhead—not cost of goods.
True COGS includes:
Materials or inventory used to fulfill the sale
Direct labor (contractors, freelancers, production staff)
Transaction fees (credit card processing, payment platform fees)
Shipping or delivery costs tied to that specific sale
Not COGS:
Rent (you pay it whether you sell or not)
Salaries for admin or management
Software subscriptions for project management
Marketing costs
Why does this distinction matter so much? Because when fixed costs get lumped into COGS, your gross margin looks weaker than it actually is—and you make bad decisions about pricing, hiring, and growth as a result.
The Sum of All Numbers team sees this constantly when working with new Fractional CFO clients. One of the fastest wins? Simply reorganizing the chart of accounts so owners can finally see their true unit economics.
Why Context Beats Benchmarks Every Time
One of the biggest takeaways from the workshop was Michelle's perspective on industry benchmarks: they're helpful, but they're not the whole story.
A 30% gross margin might be fantastic for a manufacturing business. But for a marketing agency? That same 30% means you're barely keeping the lights on.
Michelle emphasized that margins need to be evaluated against:
Your specific industry and business model
Your geographic location (labor and overhead costs vary wildly)
Your stage of growth (startups often have lower margins while scaling)
Current market conditions (supply chain issues, economic shifts, competition)
She recommended using AI tools and NAICS codes to find industry-specific benchmarks—but warned against treating those numbers as gospel.
The real win? Improving your margin by 5 points quarter-over-quarter, not obsessing over hitting some average that may not even apply to your business.
Progress trumps perfection. Every time.
The Three Expense Margins Workshop Attendees Didn't Know They Needed
This was one of the most eye-opening parts of the session. Michelle broke down how tracking three different expense margins gives you a complete picture of business health—not just profitability.
1. Overhead Expense Margin
Gross profit minus core operating expenses (salaries, rent, software, marketing, administrative costs).
This margin answers: Can I cover the cost of running this business?
This is what bankers and investors look at when evaluating your core business model—before debt or one-time purchases muddy the waters.
2. Operating Expense Margin
Overhead margin minus debt payments (loans, lines of credit, equipment financing).
This margin answers: Do I have enough cash flow to handle my debt obligations?
During the workshop, Michelle showed how an 8-percentage-point difference between overhead and operating expenses revealed exactly how much debt was weighing down one business. That's critical information when deciding whether to refinance or aggressively pay down debt.
3. Net Expense Margin
Operating margin minus taxes and one-time expenses.
This margin answers: What's truly left for the owner—and for reinvestment?
Most business owners only look at the bottom line. But when you track all three margins separately, you can pinpoint exactly where money is leaking.
Maybe your gross margin is strong, but overhead is bloated. Or maybe operations are lean, but debt payments are crushing cash flow.
This is exactly the kind of clarity the Sum of All Numbers team helps clients create through Profit First cash management strategy. When margins are broken down this way, the path forward becomes obvious.
When Getting Granular Reveals the Truth
Michelle didn't just teach theory—she shared real examples of how dialing down on margins helps business owners catch problems early and make better decisions.
The Roofing Company That Caught a Mistake Immediately
One of the Sum of All Numbers clients—a roofing company—had maintained a rock-solid 31% gross margin month after month. Then suddenly, it dropped to 28%.
Because they were so dialed in on their numbers, they investigated immediately. What happened? One employee went to a job site without the contract and made a mistake. They had to redo the work, which ate into the margin.
The fix? They made contracts accessible on every employee's phone. Problem solved. Margins back on track.
The Tattoo Parlor Owner Who Knew Her Numbers Cold
Michelle also shared the story of a tattoo parlor owner who was so dialed in on her cost of goods that she knew exactly how much ink her shop should use based on the number of tattoos completed.
When margins started slipping, she immediately suspected one of their contract designers was using the shop's ink instead of his own. The numbers proved she was right.
The Bartender Who Trained His Team on Tray Balance
Then there was the bartender who knew his margins should be 20%—and when they dropped to 19.8%, he didn't brush it off. He knew that 0.2% difference meant spilled drinks.
His solution? He trained the entire waitstaff on how to properly balance trays to prevent spills. Margins recovered.
These stories illustrate a critical point Michelle emphasized throughout the workshop: when you're tracking your margins monthly and getting granular, you can spot changes immediately and investigate the "why" behind the numbers.
Practical Strategies for Improving Your Margins
Michelle wrapped up the tactical portion of the workshop with specific strategies business owners can implement right away.
Pricing Strategy: If gross margin is too thin, you have two levers—raise prices or lower cost of goods. Service-based businesses especially struggle here because they undercharge out of fear of losing clients. But if your margins don't support growth, you'll burn out long before you lose a client.
Expense Auditing: Go line by line through overhead expenses. What subscriptions are you paying for that no one uses? What auto-renewals slipped through? Small leaks sink big ships.
Job Costing: Not all revenue is created equal. Calculate gross margin for each service or product you offer. You might discover which offerings are actually profitable—and which are quietly draining your business.
Eliminate Debt: Debt payments don't show up in gross margin, but they absolutely destroy operating margin. Every dollar spent on interest is a dollar that can't go toward growth or wealth-building. The Profit First methodology helps business owners allocate cash intentionally to pay down debt faster while still taking profit.
The Diagnostic Questions That Matter Most
Toward the end of the workshop, Michelle walked through how to investigate when margins shift—and they will.
Instead of panicking, get curious and ask:
Did we take on a low-margin project that skewed the numbers?
Did a key employee make a mistake that inflated costs?
Did our supplier raise prices?
Did we lose a high-margin client and replace them with a lower-margin one?
Are we in a seasonal dip, or is this a trend?
The number itself doesn't tell you much. The story behind the number is where the insight lives.
And if you're not tracking margins monthly, you won't catch these stories until it's too late.
Your Next Steps: The Workshop Action Plan
Michelle closed the session with five concrete steps for building financial intelligence:
1. Calculate your current gross margin.
Pull 12 months of P&L data. Separate true cost of goods from overhead using the "no sale, no expense" test. If your chart of accounts is a mess, clean it up—or bring in professionals who do this for over 200 businesses monthly.
2. Track all three expense margins.
Break expenses into overhead, operating (with debt), and net (with taxes). See which margins are healthy and which need immediate attention.
3. Research your industry benchmarks.
Use AI tools or your NAICS code to find realistic margin targets. But remember: your progress matters more than someone else's benchmark.
4. Monitor trends monthly.
Set up a system to track margins month-over-month. Spot changes early. Investigate the stories behind the shifts before they become crises.
5. Get granular with job costing.
If you offer multiple services or products, calculate gross margin for each. Double down on what's profitable. Rethink or reprice what's not.
The Bigger Picture: Financial Intelligence for Long-Term Growth
Understanding margins isn't just about knowing if you're profitable. It's about having the financial intelligence to make strategic decisions, weather market changes, and build a business that thrives no matter what the economy throws at you.
For business owners doing $1M to $15M in revenue who are ready to stop flying blind with their numbers, this kind of financial clarity changes everything.
Because the difference between a business that feels chaotic and one that feels calm and predictable often comes down to one thing: knowing what your numbers are telling you—and what to do about it.
Missed the workshop? Watch the full replay and access more monthly financial workshops—including Michelle's detailed walkthrough of calculating each margin type and what healthy ranges look like for different business sizes.
Ready for deeper support? Learn more about our Fractional CFO services or explore how Profit First can transform your cash flow.