Critical Bookkeeping Blunder: Missing Gross Margin

Startup founders beware! You might be making a critical rookie bookkeeping blunder if your financial statements don't show your gross margins.

Gross margin is an essential factor in the evaluation of startups by venture capitalists. This margin is the difference between the revenue generated from sales and the cost of goods sold, expressed as a percentage of revenue. A high gross margin indicates that a company has a strong pricing strategy and is able to charge more for its product or service than it costs to produce, which in turn will allow the company to achieve generate more profit and reinvest in the business to drive growth.

However, be cautious as you proceed to revise your chart of accounts and recategorize your expenses. Inaccurate gross margin calculations are prevalent. Including expenses that are not applicable will make your margins seem low, while omitting expenses that are relevant will make your margins artificially high. Making either of these mistakes can hurt your credibility with investors. Inaccurately low margins make your offering appear inadequate, while artificially high margins could make you appear deceptive.

In this article, we will discuss the top 5 reasons why gross margin is such an important factor to venture capitalists when they are evaluating startups.

Indicator of Profitability

Gross margin is a key indicator of a company's profitability. Venture capitalists are looking for startups that can generate profits over the long term, and a high gross margin is an important sign that a company is able to earn a profit on each sale. By evaluating a startup's gross margin, venture capitalists can gain insight into the company's ability to generate profit and sustain growth over time.

Sustainable Growth

A high gross margin is also an indicator of sustainable growth. When a startup is able to generate a profit on each sale, it has the ability to reinvest those profits into the business to drive growth. This, in turn, can help the company to maintain its competitive advantage and expand its market share. Venture capitalists are looking for startups that have the potential for sustainable growth, and a high gross margin is an important factor in this assessment.

Pricing Power

Startups with a high gross margin typically have strong pricing power, meaning they can charge more for their products or services than it costs to produce them. This indicates that the startup has a competitive advantage and is able to create value for its customers. By evaluating a startup's gross margin, venture capitalists can gain insight into their ability to price its products or services effectively, which is an important factor in determining the company's potential for success.

Competitive Advantage

A high gross margin can also be an indicator of a competitive advantage. If a startup is able to produce its products or services more efficiently than its competitors, it will have a higher gross margin and be better positioned to succeed in the market. Venture capitalists are looking for startups that have a competitive advantage, and a high gross margin is often a critical factor in this assessment.

ROI Potential

Ultimately, venture capitalists are looking for startups that can generate a significant return on investment. A high gross margin is an important factor in determining a startup's potential to deliver a strong return on investment. By evaluating a startup's gross margin, venture capitalists can gain insight into their potential for long-term success and their ability to generate returns for investors.

Venture capitalists need to see your gross margin in order to evaluate your startup. It provides insight into your ability to generate profit and sustain growth over time and is a key indicator of your startup's potential for success. Working with an outsourced startup CFO can help ensure that the bookkeeping chart of accounts is set up to show the gross margins and verify they are accurately calculated. A startup CFO will also ensure that your financial strategy is aligned with you overall business goals and that you have the financial infrastructure in place to drive sustainable growth and profitability. By partnering with a CFO, you can gain the financial expertise and guidance you need to make informed decisions, manage risk, and maximize your potential for success. In this way, you can leverage your gross margin to build a strong foundation for long-term growth and profitability, and position yourself for success in the eyes of venture capitalists and investors.