Chapter 2 – Financial Control – Rule your money
This is part of the ‘How to’ coaching series. An ongoing series of activities to make your business successful. Follow it step by step and see positive results as you develop a robust business model, set on a solid foundation.
Activity 38 – I know my Margins
What margins are we talking about? Gross profit margin or Net profit margin?
Gross Profit Margin is important to understand that your sales cover the cost of sales. Net Profit Margin shows your overall profitability.
Margin is expressed as a percentage. For example, a net profit margin of 10% shows that for every £100 of income, your business gets to keep £10 (in this case were focusing on EBIT – Earnings Before Interest and Tax)
What is the difference between gross profit and net profit? The gross profit margin is the ratio of sales income, less the direct cost of those sales. The net profit margin is the gross profit margin, minus operating expenses.
Knowing your overall Net margin is important; so is knowing the Net margins of all your individual offerings. That way you can see what is feeding the company. When you understand your margins, you can decide if you need to re-price (or even drop) profitable/unprofitable products/services.
The ‘HowTo’ bit:
As well as the calculation for working out your margins, define what margins you want to monitor.
The key is that you know what your margins are. So, set up a regular reporting schedule and make sure you have the information to hand.
Have an easily accessible report; I use a spreadsheet, into which I feed the sales, costs of sales and a percentage of the overheads. The output is read as a percentage. This gives you a view of what is happening. This is also useful for forecasting future profit/loss on individual items as well as for the overall picture.
If you would like assistance to define your margins and set up a consistent mechanism for readily ‘knowing your Margins’ Contact Us…