Getting in touch with the financial side of your business can be a challenge, especially if you aren’t a fan of finances to begin with. Even if you aren’t a fan of finances or have someone for that money stuff, you should still take the time to understand where your numbers fall. Without understanding profit margins, you are basically taking a shot in the dark with each move you make as a company.
To help you take control of your operations, Excellent Admin has compiled a 4 step process to understanding profit margins. Understanding where you are growing, and the rate of the growth, allows you to make informed and tactical decisions when you are trying to grow.
Let’s take a look at how to find our profit margins:
1 – Cost of Goods Sold
It’s time to make our first list, so let’s start with what you had to spend. Put everything down you purchase in a list. Whether it’s a monthly spending report or an in-depth spending breakdown is really dependant on your needs, but the more detailed the better is always the accountant’s opinion.
Now that you have your expenses in order, it’s time to find your totals. The total you need depends on the information you want to receive from your final product. It’s generally recommended to do monthly, quarterly, or yearly reports like this, but you might need more depending on your customer turnover rate.
2 – Revenue
Now you want to start another sheet that is meant for tracking your revenue stream. All the money you have made throughout the year should be accounted for on this list, and you should do your best not to leave anything out. It’s a great asset for any accountant come tax time, so make sure you take your time on these two lists.
Once you have all that money you made together, stop for a second to congratulate yourself on how far you have come in your business journey. Then break these numbers down into monthly, quarterly, or yearly reports like you did before.
3 – Gross Margin
Now that you have your CoGS and Revenue numbers together, it’s time for a bit of math to find your gross margin.
Use this equation:
Revenue – CoGS = Gross Margin
This number is essential for finding your profit margins, and you want to see a positive number at the end of this equation. If you don’t, you already know you are operating at a loss, and the margin numbers are going to reflect that too.
4 – Profit Margin
Finding your profit margin is done through another simple equation like before:
(Gross Margin / Revenue) * 100 = Profit Margin
Using this equation, you will get the percentage of profit you are making. If it doesn’t seem right, try the equation without multiplying it by 100. The first two numbers after the decimal point are your percentage.
Conclusion
This is a simple way to find your profit margins. This step-by-step guide to find your profit margin will help you understand if your business is working, or if it’s time to go back to the drawing board. A good profit margin varies by industry, so take some time to familiarize yourself with good profit margins in your industry.
Remember, you apply this process on any scale in your company. It’s a good idea to take the time to do this process for your overall operations, and you can apply this to a per product breakdown for more detail information on your gains and loses.
If you are looking for a direct equation for finding your profit margin, you can use this:
If you are still having trouble or you need someone to help your control your finances, you can always reach out to an Excellent Admin for help.
Our professionals are trained to help you control your inflows and outflows, so you can have the financial insight you need to help your business grow.