This document explains how OAG calculates the gross margin benefits for
achieving the aspirational targets identified by the assessment.
Gross margin is defined as Net Sales minus Cost of Sales (CoS) i.e. the amount of money a company retains after incurring the direct costs associated with producing the goods and services it provides.
Net sales = gross revenue, less the returns, allowances and discounts.
CoS = the direct costs associated with producing goods and services.
(Net sales – CoS) / Net Sales = Gross margin %
One of the outputs from the assessment is a forecast of the gross profit improvement for achieving the aspirational goals. To calculate the benefits, your current gross margin is entered as a baseline in the ‘Enter Financials’ form. It also establishes the preferred currency for inclusion in the reports.
The financial data is used as a baseline to calculate potential improvements in gross margin and gross profit.
To calculate the financial benefits, the available improvement is established. This is the gap between the selected ‘Aspiration’ and the ‘Current’ state of the operation established on completing the assessment questionnaire. The maximum level of improvement is the gap between the maximum aspiration level and the minimum current state level. OAG has set the maximum available improvement at 33%.
NB: Details on the ‘The OAG Default Improvement Explained’ can be found in ‘How It Works’.
There are 7 key components covered in an OAG assessment and each contributes to gross margin performance. The 33% available improvement has been distributed between the 7 key components with a weighting based on their contribution to gross margin.
In the ‘Enter Improvement Values’ form, the ‘OAG Allocation’ column shows this weighted distribution. The ‘Remaining Improvement’ column is the OAG allocation net of the assessment score resulting in the residual improvement still available for each component, e.g. for an aspiration set at 5 and a current score of 2, there are only three levels of improvement or 60% of the OAG allocation available.
The 33% is based on a CoS of 60%. CoS varies from business to business, higher or lower than 60%. The ‘Lead Assessor Adjustment’ column enables the assessor to adjust the remaining Improvement value for each component to tailor the available improvement to the business. Lead Assessor adjustments replace the remaining improvement in the calculation of gross margin improvement benefit and thereby the financial benefit forecast. Here, the Lead Assessor has used the default percentages for all but ‘Leadership’ where an adjustment has been made to the remaining improvement:
The gross margin Improvement percentages are applied to the current gross profit value to calculate the projected gross profit improvement benefit.
In the ‘Enter Financials’ form, a £10m turnover business with £6m, (60%) CoS was entered, thereby producing a gross profit is £4m (40% gross margin). Once the improvement percentages have been applied, the financial benefit for achieving aspirations can be forecast. In this example, the forecast is £449,200.