As a business owner, your ultimate goal should be to increase profits and grow your business. In order to do this, it’s important to understand what profit margin is and how you can increase it.
Once you understand the ins and outs of this concept, you can start taking steps to increase your business profits and reinvest those profits into your business.
What is Profit Margin?
Profit and profit margin are two similar but different concepts.
Profit is your total revenue minus your total expenses. It’s a measure of how much money your business has left after expenses. There are several different types of profit, including gross, net, and operating profit.
Your profit margin, on the other hand, is a percentage that represents your business’ profitability. It measures how much of each dollar you earn turns into profit.
For example, if your profit margin is 20%, it means that you made $0.20 in profit for each dollar you made in sales.
There are two main types of profit margin: net and gross.
- Net profit margin measures your profits after all expenses have been subtracted from your total revenue.
- Gross profit margin measures profits after expenses related to making and selling your product or service.
Profit Margin Formula
The formula for net profit margin is:
Net Profit Margin = (Net Income / Revenue) x 100
Say, for example, that at the end of your fiscal year, your business records revenue of $21 million and a net profit of $2 million.
To calculate your net profit margin, you would use the following equation:
Net Profit Margin = ($2 million / $21 million) x 100 = 9.52%
In this case, your net profit margin would be 9.52%, meaning you made $0.095 for every dollar earned through sales.
Other Terms You Need to Know
Cash flow and revenue are both very important factors of business growth, so it’s important to understand these terms and how they relate to profit.
Cash flow is the money your business has available to cover operational expenses at any point in time. This is a great indicator of business liquidity.
Positive cash flow means that your business is able to cover daily operational activities, taxes, and other operational costs.
Positive cash flow can be generated through sales, investment dividends, or business loans.
Revenue is simply all of the income your business generates. It typically refers to income made from sales, but revenue can also come from rental or interest income.
Revenue is referred to as a business’ top line as it is generally listed at the top of the income statement.
Whereas revenue is your business’ total income before expenses, profit is your business’ revenue minus your expenses.
Understand the difference between profit, cash flow and revenue. That way you can pinpoint what your business needs!
When Should You Focus on Profit Margin?
Ultimately, every business’ goal should be to turn a profit; however, that doesn’t mean that profit should be your only concern.
In order to keep your company’s doors open, you need to have a positive cash flow. If you aren’t able to maintain positive cash flow, you might not be able to stay in business long enough to become profitable.
By focusing on increasing cash flow and revenue, you will eventually also increase your business profits, assuming you don’t incur any new expenses.
Tips to Increase Your Business Profit Margin
There are several ways your business can increase profit margin, including:
- Revise Your Business Plan: Revising your business plan can help you cut expenses, establish goals, and identify other ways to increase your profit margin.
- Improve Bookkeeping Practices: Improving your bookkeeping practices will help you identify ways you can save money, which, in turn, will boost your profits.
- Increase Sales: Aside from cutting expenses, boosting your sales can increase your income to improve your profit margin. This can be done through promotions, new marketing strategies, or other methods.
- Get Financing: A business loan can help you grow your profit margin by helping you pursue new business growth ventures.
- Change Prices: Increasing your prices to match demand can be a great way to generate revenue. Alternatively, loss leader pricing can help you attract new customers and boost sales on certain products.
- Cut Expenses: Every penny counts when trying to increase profits. Cutting as many expenses as possible, no matter how small, can help boost your profit margin.
- Use Digital Marketing: Online marketing is a great way to build brand awareness and increase sales. You should also consider opening an online store to boost total sales.
There are nearly countless ways that you can boost revenue, cut costs, and increase profits. By implementing some of the methods listed above, you can continue to grow your business and increase your profit margin.
Are You Ready to Increase Your Business Profit Margin? Camino Financial Can Help
As mentioned above, financing is a great way to increase your business profit margin.
A small business loan can help you grow and increase revenue by helping you:
- Purchase equipment
- Implement new marketing strategies
- Hire new employees
- Pursue new business ventures
- And more
By using a business loan to pursue new ventures and reinvest in your business, you can boost sales, attract new customers, and increase cash flow.
At Camino Financial, we offer great, borrower-friendly business loans to help business owners like you increase their profits.
Our loans are easy to apply for, offer lenient requirements, flexible loan limits, favorable terms, and more. Additionally, our business loan specialists can work with you to find the ideal financing solution for your business.
If you want to see for yourself how our business loans can help your business increase its profit margin, use our business loan calculator to see our loan terms and payment plans.
If you’re ready to start taking the necessary steps to increase your business’ profit margin, we invite you to apply for a loan today.