Here at Big Red Cloud we encourage you to keep your accounts up to date so that you can get critical performance information on your business.
Profit margins are a critical part of understanding your business’ financial records and what comes from the day to day work that you put in.
A profit margin is a ratio calculation which shows how much out of your overall sales the company actually keeps.
There are two common profit margin calculations. One for gross profit and one for net profit. The figures for both gross and net profit can be found in your Profit and Loss account. Your gross profit is your sales figure minus the cost of goods sold or services provided. It shows how much profit the company made after deducting the costs directly associated with producing the goods or providing the services they received revenue for.
This shows how profitable your core business activity is. By running a gross profit margin we are able to see what proportion of money we have kept after our cost of sales or services outgoings have been deducted.
Gross Profit Margin = Gross Profit/Sales
Our net profit shows the money that the business has held onto after expenses are deducted from gross profit. Expenses outgoings that aren’t directly related to the core business. For example, for most businesses, a bill from their telephone provider would be classified as an expense.
Usually, businesses are taxed on this net profit number. We can run a net profit margin to show us what proportion of the money we make from sales we are actually holding on to after all outgoings have been accounted for. A businesses net profit margin should always be lower than its gross profit margin as it accounts for expenses.
Using profit margins is important, by doing so, you will know how profitable your business is and whether outgoings are mainly coming from core business activities or from expenses. Armed with this information, you can start to make decisions to allow your business hold on to even more money from each and every sale it makes.