Why is Your Profit Margin Important?

Posted by on Jun 29, 2016 in Blog

Why is Your Profit Margin Important?

As a business owner, there are a lot of figures that you need to keep your eye on. Several of these statistics serve as critical indicators of the overall health and long term stability of your company’s finances. One of the most important of these statistics is your profit margin, as it provides a quick glimpse into your company’s efficiency and performance.

Since your profit margin is such a bellwether of your company’ overall condition, it can have a significant impact on your strategic planning process. Understanding it also enables you to take quick action and adjust course when there are signs of financial difficulty.

Understanding Your Profit Margin

There are two figures that you need to keep in mind when determining your profit margin, and that is your gross profit margin and your net profit margin. Determining these two statistics is generally a straightforward calculation.

  • Your company’s gross profit margin is determined by dividing gross profit by its total income.
  • You can define your net profit margin by dividing your company’s net income by its total income.

Once you have determined these two figures, you can then use them to compare the performance of your business with other companies. Often, it is helpful to compare your company with those of the same size, in the same locality, and especially in the same industry or sector of the economy.

Business owners can also compare their current profit margins to those from their prior financial periods, such as quarterly, and annually. Doing so enables you to determine if your company is growing over time. It can also help you to spot developing trends that can affect your overall performance, such as a rising cost of goods sold, or increasing expenses, both of which can decrease your profit margin.

Additional Reasons Why Understanding Your Profit Margin Remains Important

One of the most important reasons why you should regularly determine your profit margins is that it provides you with an idea of what your actual return of investment is for all of your efforts and hard work. While most business owners have several competing goals, few ever go into business with the idea that they want to lose money. In fact, without regular infusions of outside funding, few businesses can operate in the long-term unless they have a healthy profit margin.

Deciding on a benchmark or goal for your profit margin depends on a host of factors. These include challenges faced by your industry, the current state of the economy, the financial condition and efforts of your direct and indirect competition, as well as your resources and strategic plans. Even the way that you go about advertising and selling your products and services can have a huge impact on whether your profit margin is within a healthy range. So even if your profit margins show growth over time, it may still not be enough to justify your investment.

As always, we are here to help you and your business succeed. Why not get in touch today and let us assist you with tracking your profit margins and creating strategic business plans that will encourage real growth and stability over the long-term?