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calculating profit margin

Marcus Lemonis loves to remind business owners that “If you don’t know your numbers, you don’t know your business.” And those numbers he refers to include “margin” as in the profit margin, expressed as a percentage, on every product and service you sell. To make things a little more fun, for our conversation “margin” can be expressed after production costs (gross margin) and after operating costs (net margin). It’s important to recognize the difference to ensure we are looking at the right numbers to make decisions.

 

 

 

Profit Margin: Gross Margin

 

Gross Profit Margin is calculated by subtracting what it costs to produce something from how much it is sold for. For example, it costs you $5.00 to produce a widget (labor and all materials) and you sell it for $10.00. You have a 50% gross profit margin.  This is only half the story though because you have other business costs (operating costs) that also have to be paid from the gross profit.

 

To figure out our net profit we need to further subtract the operating costs from the item. If each $10.00 item actually incurs $1.00 of operating costs, the net profit isn’t $5.00, it’s $4.00.  That’s the number we want to work with for managing pricing and expenses. In our example, this $10.00 item has a 40% net profit margin.

 

Anything that affects that $4.00 net dollar amount affects the margin of the item. If costs go up or down, that $4.00 can get bigger or smaller. Let’s say that materials go up in cost $.50, so that costs are now, $5.50 to produce, the net margin goes down from $4.00 to $3.50. From 40% to 35%. Make sense?

 

 

 

 

If you don’t know your margins, you need to take a little time to figure them out. The amount of margin that’s considered “good” or “healthy” varies by industry. Restaurants typically have lower margins than retail and retail is typically lower than many service provider businesses. Online businesses have lower operating expenses and often higher margins than businesses with physical locations.

 

 

 

 

PROFIT MARGIN: WHAT AFFECTS IT?

 

This article is about the things that affect your margins, and margins can be the difference between struggling and thriving. And those things are many. Changes in any costs can affect your margins and require you to address your pricing to maintain your profits. Any cost. Utilities, service providers, suppliers, and other expenses can go up in cost at any time unless you are under a contract.

 

As margins go down, there is less and less money left over, and it can affect your growth and your ability to weather any unexpected events. This is why I encourage entrepreneurs to check their expenses through the Breakthrough Number process once a quarter. You can use these resources to figure yours.  Keeping your eyes on the margin can help you head off issues that can affect the health of your business. Set aside the time to learn your numbers.

 

 

 

AUTHOR’S NOTES:

If you want to walk through a step-by-step method to manage your margins, your income, and profitability, join me for the next Quarterly Intensive. Visit https://entremoneycoach.kartra.com/page/quarterlyintensive to learn more.

There are steps all across your business processes that have the potential to create or reduce profit for your business.

Profit is the key to growing your business and it is the money left over after everything is paid.

Remember, business isn’t about breaking even, because breaking even keeps you small. The more profit you generate, the more you will have growth to create an impact in the world.

 

Here are 5 tips to maximize your profit and avoid losing it.

 

1. Manage your time

 

Your time has value. The longer you spend on things that aren’t revenue generating, the more profit you can use every day.

If you have a process to make widgets, for example, but you are interrupted every 15 minutes to answer emails or to take calls, the time it takes you to produce the product is longer, but you aren’t getting more money for the widget!

The time interruption takes you off task, and actually costs you real profit!

Make a list of everything you have to do and decide what is actually going towards making money. Use time blocking to manage your schedule and prioritize those things that make your company money.

Delegate the things that aren’t generating revenue and are not in your zone of genius.

 

2. Manage your costs

 

Every time you pay for something you don’t need or will not use you are taking money from your profit.

Perhaps it’s a subscription that you are no longer using or maybe you haven’t looked at your suppliers in a few and their prices have creeped up or you have gotten into a groove and haven’t looked at your expenses in a while.

It is important to be as “lean” as possible in business to keep as much profit as possible.  Every unused subscription at $12.95 a month adds up!

Review your processes at least once a year and check your providers for new or different capabilities and packages.

Are there places to streamline to one provider, or to change providers that allow you to be more efficient in your process?

 

3. Manage your delivery process for your products and services

 

When you coach clients, do you typically go over time? Do you run to the post office every day to mail orders?

Is your process clunky in returning emails to customers who have questions or problems? Do you have a client flow process from onboarding to completing your service or product delivery? 

Your delivery process for your products and services can directly impact your profits.

If the processes are not clear and there are inefficiencies anywhere along the line you will eat into the profits you are creating. Keeping your process as simple as possible while giving legendary service is crucial.

 

4. Watch the “flash sales” and cutting prices too often, it can look like desperation

 

When sales slow, it can be an immediate instinct to cut prices and try to make money on volume. Every time you cut your prices, you cut profit.

I know holding sales can be great for business but do it with a plan. If you get desperate every month and hold a flash sale the last week, your customers will get smart, and wait until then to order.

Plan your sales and tie them back to some business purpose. Are you holding a sale to add customers to your list? Or maybe for a product or service launch? An early bird?

Cutting prices early and often is a recipe to eat your business profit.

 

5. There is more money in your follow up.

 

I recently read that over 80% of sales is in the follow up, after 5 contacts. So have a follow up process.

Whether it’s an email newsletter or email nurture sequence, a plan for phone call contact, the follow up is critical to the sales, and therefore the profit your business makes.

Additionally, it is easier to keep a client than to acquire a new one. You can resell products and services to your existing clients with less effort than gaining new ones.

As I’ve moved to more online business, I’ve realized that I’m actually pretty bad at this one and have been working hard to create a good system for myself. I know it is critically important.

If you are here it’s because you are trying to maximize the profits in your business, right? You want more growth and impact.

You can grab a spot on my calendar for a free 30-minute call by visiting https://dawnkennedy.as.me/support and we can talk to see how I can help you and if we are a good fit to work together in your business.