The situation
The month closes with revenue $73K above budget. The sales team is pleased and management expects a strong result. Gross profit comes in only $2K above budget, and gross margin falls from 33.2% to 31.5%.
A standard report shows both facts and stops there. Management is left with a percentage that moved and no explanation of why.
What the bridge shows
A gross profit bridge splits the change into the drivers that management can act on. In this example, volume added $31K and list prices added $13K. Discounts took back $34K. Product mix and unit cost took a further $8K between them.
The pattern is common: the extra volume was bought with discounts. One product line, Industrial supplies (MRO), grew 13.9% against budget while its discount rate went from 4.0% to 8.6%. On $72K of additional revenue it produced $1K of additional gross profit.
Gross profit: budget to actual
March, US$ thousands. Change vs. budget by driver.
Why it matters beyond gross profit
Commissions and freight follow volume, not margin. The low-margin sales carried full variable costs, so operating expenses rose $13K over budget and EBITDA ended below plan in a month of record sales.
What management can do with it
The bridge turns a vague concern into three specific decisions:
- Set a discount ceiling for the line where the gap is concentrated, with approval required above it. Each point of discount on that line is worth about $6K of gross profit a month.
- Ask the sales team which customers received the discounts and what was obtained in exchange.
- Review next month whether volume holds when discounts return to plan. If it does not, the growth was never profitable.
The management questionIs growth creating more gross profit, or simply more revenue?