The profit of a business is completely different to profit margins, and the increase of one doesn’t automatically mean the increase of the other. Profit can be calculated by subtracting total expenses from the gross profit of a company, which will leave the net profit figure. Profit margins are measured as percentages, and to calculate them, you need divide the net profits of the business by the total amount of sales.
Why are profit margins important?
Although the number of sales and turnover is key, it is also necessary for a business owner to understand profit margins, as this can help to increase revenue and profit. Financial outsourcing may be required until you have significant knowledge of profit margins, and possibly beyond. Although sales of a company may increase, it is also possible for the production costs to go up too, which will reduce the profit margin. Here are five ways to increase them:
1. Review income and expenditure to check whether there are any expenses that can be reduced. Being able to reduce production costs and increase revenue will boost profit margins
2. Cut costs where possible, including the utility bills and other running costs. Review the cost of travel and decide whether you could reduce the amount of it undertaken. If you can downsize to smaller premises, consider whether it would be a viable option for the long term
3. Costs of production are one of the main factors when calculating profit margins, so consider how the expenses of manufacturing goods or providing services can be reduced. You may be able to source the materials from a cheaper supplier, or use materials of a slightly lower standard and cost without having an adverse effect on the quality of your goods
4. Don’t keep any more stock on hand than you need to. If you hold large quantities of merchandise, you are sitting on potential revenue. Although it may be a balancing act, try to order sufficient materials to produce the goods ordered, and make sure your supplier can deliver at short notice
5. Make it a regular practice to examine your business to check both profit and profit margins, so that you can tackle any potential problems before they get out of hand. Periodically, go through the production costs and see whether goods are being produced at the lowest possible cost
If you want to know more about managing profit margins, call us today for advice.