It’s necessary to know whether or not your business is getting anywhere. You can’t just spend your money, energy, and efforts in running a company that was never going to give you more profit to balance out all that you give to it.
Profit margins are one of the ways you can gauge whether or not your establishment is doing good or bad. You can certainly hire somebody to do all the analysis for you.
But what if you want to compute it on your own? Well, in this short guide, we provide you with different ways of analyzing and getting the profit margins of your company.
Profit Margin, Defined
A profit margin is defined as the percentage of revenue your business gets to keep after dealing out expenses. This is usually computed for a specific time period to help business owners determine the current state of their company.
It also aids them in making specific decisions for their company. These include cutting out some business operations or finances.
A profit margin can also refer to how much profit you keep for each money generated from a sale.
Profit Margin Types
There are different ways for you to actually check for profit margins. In this section, we look at the various types of profit margins and what it tells you about your business.
The first type is the net profit margin. Referred to as a company’s bottom line, it determines the amount of profit left after all the expenses have been accounted for.
The net profit margin looks at a business’s cost of goods sold, operational expenses, and any income from investments. It usually shows how a company can turn income into profit.
You can get a net profit margin by using this formula:
Net Profit Margin = (Net Income / Revenue) X 100
The next type is the gross profit margin. This is the amount or percentage left after accounting for the expenses you spent in making products or overall operational costs.
Computing for this margin will tell you how much you can earn from a single product or service. This will help you decide on whether or not to continue producing or offer them up for sale.
Use this formula to determine a gross profit margin for one of your products or services:
Gross Margin = [(Total Revenue – Cost of Goods or Services) / Total Revenue] X 100
The last margin type is called the operating profit margin. It takes all the operating, administrative, and sales expenses that is used for day to day operations.
We do have to note that debt and taxes are not considered in this margin.
The operating profit margin is calculated to show you your earnings from operating activities.
Here’s how we can get a company’s operating profit margin:
Operating Profit Margin = (Operating Income / Revenue) X 100
The Standard Profit Margins
So, now you’ve done the math and got all the profit margins you need. How do you interpret that?
What is a good or a bad profit margin? Well, this usually depends on the company and the industry they belong to.
It’s best to compare your profit margins to other businesses that have the same size and industry as you.
So, what is a good profit margin? Take a look at some standard net and gross profit margins for various industries below
|Industry||Net Profit Margin||Gross Profit Margin|
|Auto Repair & Maintenance||12%||21%|
Here’s How You Can Improve Your Current Margins
The main goal for you is to try to lower your company’s costs and expenses. In addition, aiming to increase sales would further improve your establishment’s profit margins.
To lower costs and expenses, you can try reducing business and operating processes. Also, you can try looking for alternative methods that would make you spend less money to produce the products you’re selling.
In addition, you can also analyze your business flowchart. Make sure to identify all the wasteful process that are not necessary for your operations to flourish.
The second thing you want to achieve to gain a better profit margin is to increase sales. Here are some of the things you can do to get through this achievement.
First, try having a sale on old inventory. While it might not give you back the full profit you need to make up for the expenses you spent making them, getting something from them will still be better than nothing.
Another thing you can do is to try reaching out to more potential clients. This is where advertising comes in. You can put up a business listing of your company online, so clients can easily view the services you offer.