You can never run a business with nothing but your gut-feeling because there are different complicated points and process that must be done accurately. Profit margin in particular is one of the elements of a business that company owners must be aware of and familiar with as it shows you how well your company is handling its finances and how efficient you are at operating it. Here we’ll answer some of the most commonly asked questions about profit margin so we can enlighten retailers about the importance of it.
How is profit margin calculated?
Profit margin can be derived by dividing your gross profit by revenue. To make the it a percentage, multiply the result by 100. Let say the margin shows 40%, that means you get to keep that same percentage from your total revenue.
What does a high profit margin mean?
Since profit margin is the result of your company sales minus costs then divided by revenue, it determines the performance of the company. So, having a high profit margin means good news, because it tells you that your company can make a reasonable profit on sales. Meanwhile, having a lower margin can mean your company is underpricing. It’s important to note that the higher gross profit the more the investors are willing to pay. The ideal profit margin for online retailers is said to be around 45% while other industries ranges between 20% and 25%.
What is gross profit percentage?
Gross profit percentage or gross margin, is the percentage margin earned on a product or service after deducting production costs like labor, materials, etc. from the revenue.
What does operating profit margin mean?
Operating profit margin is about a business’ profit minus the production costs composed of wages, materials, and other operating expenses. It shows how the efficiency of a company in controlling the cost and expenses that comes with operating the business.
To calculate it, simply deduct your total operating expenses from your gross profit. Then divide your operating profit by gross revenue to calculate the operating profit margin.
Increasing profit margin by reducing operating costs
One way to quickly increase profit margin and boost profitability is through cutting some parts of the overall operating costs. But this won’t go easy specially because the expenses of business vary.
In this case, auditing everything that comes with operating your business becomes vital. Among the things that you can include are labor costs, licenses and tax deposits, equipment and maintenance fees, office space and utilities, employee benefits, and insurance. You can then check where it’s best to cut off your expenses.
Choosing the right technology for your business will also make a huge impact to your business. But you have to be wise and use it on time-consuming tasks. This way you can utilize your workforce, your time, and your resources on other important parts of your business.
For small businesses, reduced operating costs doesn’t mean their operation should be more complicated and difficult because there are countless ways that they can cut it without compromising the quality of their products and services.