What is a profit margin?
Profit margins are measured in percentages and it measures how much out of every dollar of sales a business keeps in earnings. The calculation is the company’s net income divided by the net sales (revenue).
Net income or net profit is also determined by subtracting all of a company’s expenses from its total revenue.
Why is profit margin significant to your business?
Just because sales are increasing doesn't mean that your business is earning more money. The compass for your business is to create a budget/forecast for the year that will allow you to navigate towards profitable targets. You may not always hit your targets but you will undertand why you didn't. Reporting actual vs budget each month will allow you to understand why you exceed, meet or missed your profit margins. It will help you course correct quickly as you navigate each month.
What's a good profit margin?
Companies in different industries will have varying profit margins. Businesses should always create an annual budget/forecast for their company. This will allow them to set their own profits margins based on a set of assumptions. Then, I would find out what your industry benchmark standards are to see if your budget/forecast are in ballpark. At the end of the day, it is the executives of the company that will approve the budget/forecast profit margins to navigate the year.
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