Your business’s profit margin is a key financial metric that can instantly tell you how well or how poorly your business is performing. But, beyond just measuring this figure, you should understand how it is calculated and the ways you can improve it. Here is what you need to know about calculating and improving your business’s profit margin.
What is Your Profit Margin?
Before you can start calculating or improving your profit margin, you need to understand what it is. Your business’s profit margin measures the percentage of revenue it keeps after paying for its expenses. In other words, your profit margin tells you, as a percentage, how much profit your business generates for every dollar of sales. For example, a 30% profit margin means you have a net income of $0.30 for every dollar of sales.
How to Calculate Profit Margin
The formula to calculate your profit margin is simple. It’s your net income divided by net sales. Most businesses use the following formula:
Profit Margin = (Net Income/Net Sales) x 100
Your Net Income is your total revenue minus expenses. And your Net Sales are your gross sales less any returns, discounts, or allowances.
Ways to Improve Your Profit Margin
Your business should track and try to improve its profit margin because this is the best way to ensure and sustain growth. Beyond that, knowing your profit margin can help you spot and resolve issues. It’s also an important criterion for some types of business financing. Here are a few ways you can improve your profit margins:
- Cut expenses — You can boost net income, which is one of the elements of your profit margin, by lowering your costs.
- Get rid of underperformers — Maybe one product isn’t selling as well as the others. Eliminating underperforming offerings can boost your profit margins.
- Add more products or services — Using the same principle, you can add additional products or services if they will sell well while keeping overhead low.
- Increase prices — Raising prices is another option as long as you remain competitive.
Your target profit margin will vary depending on your industry and many other factors. It’s tough to pinpoint a single figure you should use as a target. But your margins should be experiencing steady growth.
Bottom Line on Profit Margins
You don’t always need to make drastic changes to your business to realize significant improvements to your bottom line. Sometimes, a simple pricing adjustment or changes to a vendor agreement can result in better profit margins.
When it comes to getting the best business results, there isn’t a one-size-fits-all solution. What works for your business may not be effective for someone else.
At CAB Capital, we offer a variety of commercial and business financing options, including some specialty products designed to suit the needs of our diverse group of clients. Contact us today to learn more about how our products and services can help you improve your overall results.