Businesses are always looking for effective ways to improve their profits; whether cutting on expenses or increasing marketing efforts, they are always searching for new things to level-up. This is why it is also important to work out a business’ profit margin.
The profit margin is essential especially if the business is trying to increase earnings. However, some companies, particularly start-ups may not appreciate its value. But in reality, computing the profit margin is a simple and quick way to identify the profitability of any business.
Why Do You Need to Know Your Profit Margins?
The profit margin is the global benchmark in identifying the health of a business. This figure is important for:
- For business growth – The higher your gross profit margin would be, the more you can achieve a solid net income and an operating profit margin. Banks will also require this report when you take out loans for additional funding.
- To identify and resolve issues – A narrow gross profit margin is a symptom of a bigger problem. If your profit margin is not so good, you can then perform an audit of your business finances. Furthermore, it is best to reassess strengths and weaknesses, and make the necessary adjustments.
- To use for financing purposes – The profit margin is important when seeking additional funds and financing for businesses. For mergers and acquisitions, this would be the first financial report required; the same goes for initial public offerings (IPO). Having a healthy profit margin gives businesses a better chance of getting approved for financing and loans as this shows if the company is doing well.
How to Calculate the Profit Margin?
For business owners, here are two ways in which an accounting firm calculates the profit margin.
- Gross Profit Margin – To obtain this, take the total revenue and deduct it with the cost of goods sold. The resulting difference will then be divided by the amount of the total revenue. The result will be multiplied by a constant number 100.
- Net Profit Margin – The net profit margin is computed by taking the gross profit (computed as the total revenue deducted by the cost of goods) minus the total operating expenses (plus taxes, interest, depreciation, etc.). Another way is to divide your net income by the total sales.
What is a Good Profit Margin?
When computing the profit margin, companies always need to benchmark with their industry and understand the industry’s average profit margin. Although it will depend on the industry, generally, a good profit margin is 10% of sales. Lower than that and the company needs some serious rethinking to do.
How To Improve Your Profit Margin?
If your profit margin is not doing well, here are some strategies to help you.
- Decrease expenses – Cutting down the operational cost and overhead will help increase your profit margin. Additionally, automating workflows to eliminate redundancies and optimize labor efficiency is another effective strategy. Cost-saving measures will also help reduce utility costs, while transferring to a smaller location will decrease rental expenses.
- Add product offers or services – Another way is to improve them with add-ons. These are fees added to the basic charge for extra services or features. For instance, a business can offer delivery services for a small fee so people won’t have to drive to the store to get the product.
- Cut poor performing products or services – Auditing your sales will determine which among your products and services are non-performing. Letting them go in favor of your stronger products will reduce expenses and focus resources on products with higher profitability.
Know Your Company’s Profit Margin with the Help of an Accounting Firm
You can determine your company’s profit margin with the help of an accounting service provider. Hiring Corporate Services Singapore will help boost your business through efficient accounting and auditing of your company’s finances. The professional accounting firm can give you insights on your business’ financial standing and advice on to increase the profit margin.