You probably already know about the importance of high profit margins, but still may wonder, “How do you figure margin?” It’s easier then you might think and the good news is you can begin calculating your margin now with my free Excel spreadsheet!
Gross Profit ÷ Total Revenue = Profit Margin
If your previous month’s total sales were $301,524 and total expenses were $174,100, your gross profit would be $127,424. To figure margin, take $127,424 and divide it by $301,524 which results in a gross profit margin of 42.3%.
Gross Profit ($)
$301,524 - $174,100 = $127,424
Gross Profit (%)
$127,424 ÷ $301,524 = 42.3%
Why You Should Care
Profit margin is a great way benchmark any company when considering how well they make use of their resources. After you ask the question, “How do you figure margin?” you should wonder, “What is the margin of my competition and is mine better?”
Let’s assume that a competitor has reported a monthly revenue of $539,104 with expenses totaling $373,593. In the end, they earned $237,580 more in revenue and profited $38,087 more than you.
But we’re not done comparing!
Your company had an 11.6 point higher profit margin. By asking, “How do you figure margin?” you uncovered new insight into your company, and your competition.
You are! When it comes to efficiency, your company comes out on top by making better use of your available resources. In other words, your company keeps more of each sale because your expenses are relatively lower than those of your competition.
Wall Street LOVES high gross profit margin percentages. They know it’s safe to assume that a company with a high profit margin will show strong returns. The only exception is if the company experiences a dramatic increase in overhead costs.
Doing Your Homework
One of the best ways to uncover the numbers for your competition is online at Hoovers.com. If your competition is privately held, raise your standards. Find a publicly traded company that is similar, if not identical, to your company to act as a benchmark. Percent gross profit is a great equalizer. It takes companies of all sizes and puts them on the same playing field.
Using margins from publicly traded companies to benchmark your company is a great way to set goals. The higher they are, the better you’ll feel after you reach them!
Margin & Pricing
Another question to answer after, “How do you figure margin” is,”How can it help me with pricing?”. Figuring margin percentage is a powerful tool to determine how to price your goods and services. It helps you understand how your prices influence profitability.
Some business owners are reluctant to raise prices for fear of revenue loss. But remember, if your prices are higher, you can sell less and still meet your revenue goals.
If your margin is 50% and you increase your prices by 20%, you can afford a 29% drop in revenue and still maintain the same overall profitability.
Another excel spreadsheet of mine, details how much revenue you can lose when you raise prices and still maintain the same profit margin. Your goal is to maintain the highest possible profit margin. If you experience a larger percentage of loss than shown on the sheet, and your profit margin drops after you raise prices, you need to lower them immediately.
The opposite also holds true. If you experience smaller loses in revenue than shown above, you could safely increase your prices further. Margin can help you find that golden price point that serves your clients, and yourself, well.
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