Profit margin is a key indicator to your business health. Boost it to have a healthier business and more money in your pocket.
Imagine your business as a living, breathing organism. Just like we monitor our vital signs to ensure health we need to monitor the vital signs of our business to make sure it’s operating at top level also. Profit margin is a great indicator of the health of your business.
Today in 5 minutes or less…
- Understand profit margin
- Case study on increasing profit margin
- Strategies for boosting profit margin
Understand Profit Margin
What is profit margin?
Profit margin is a percentage of net income to total revenue. It’s the measure of your ability to make money. The percentage represents how much of total sales you get to keep as profit.
It’s not just a number on the paper. It’s a vital sign for your business.
Think of it as your temperature. Just like a doctor monitors ours to ensure we’re healthy, we must monitor our business’ to ensure it’s health.
Our businesses thrive when profit margins are robust. It’s the lifeblood of growth and survival, ensuring we get to continue on the journey.
Tracking this number will give you an early alert of trouble on the horizon. This empowers you to diagnose and fix the issues before they spiral out of control.
Factors affecting profit margin
- Gross Revenue is the total income you bring in.
- COGS (Cost of Goods Sold) are the cost of labor and materials related directly to your production.
- Operating Expenses are all the expenses you need to operate your business. This includes rent, equipment, inventory, marketing, payroll, insurance, and any other expense to keep your business running.
- Profit is what you have left after all expenses are deducted from your gross revenue.
Common pitfalls to avoid
- Unnecessary expenses
- Too few or too many employees
- Inaccurate pricing (prices that are too high or too low)
- Not monitoring financials
Case Study
HomePro Solutions
HomePro solutions is a high-quality home renovation and remodeling company that’s been in business for 15 years.
Alex started the company when he was 22 and has built a $1.8 million dollar business. He has 8 employees and now that he’s started a family he wants more time to coach his kid’s sports teams and spend time with his wife.
He’s pretty sure he’s making money but he’s been so busy in the business he’s never stopped to figure out what the numbers are.
Here’s the information Alex needs to find out what his profit margin is:
Gross Revenue: $1,800,000
COGS + Operating Expenses: $1,602,000
Net Income: $198,000
Here is the equation to calculate profit margin:
Net Income / Gross Revenue = Profit Margin
$198,000 / $1,800,000 = .11
So Alex has a profit margin of 11%.
Having owned a landscape company for 8 years my experience tells me a healthy profit margin for a home service company would be 30%.
This is the number I always aimed for. Usually I’d come in closer to 25%, which is still good.
If you’re operating below 10% then you have a lot of room for improvement.
Alex has $198,000 in profit. Here’s how he likely distributes it:
$60,000 into new equipment
$10,000 in employee bonuses
$20,000 in operating capital
This leaves $108,000 in Alex’s pocket.
The good news is, he’s making money!
Some businesses aren’t so lucky. You can operate at a negative cash flow for years and never notice it as long as you have continuous income.
As soon as something happens that causes incoming business to decline they’ll find themselves in a hurting situation pretty quickly. This is how businesses fail.
When the tide goes out you’ll see who’s swimming naked.
So what can Alex do to decrease his time at work so he can spend more of it with his family?
He can boost his profit margin so he can afford to hire somebody to fill his role in the company.
Strategies for Boosting Your Profit Margin
- Increase Prices to directly impact your bottom line.
- Decrease Expenses and find where you can cut costs without sacrificing quality.
- Streamline Operations automate tasks and improve workflows so jobs get done more efficiently.
Whenever you’re ready here are 3 ways I can help you:
- Workshops that help you strategically build your business to operate without you. Hosted quarterly. You can stay in the loop by reading the newsletter for upcoming dates.
- Online business tools and community to help you systemize your business. Launching July 2024!
- My elite cohort coaching program. Sign ups every March, June, September, and December. Only 5 openings per group.
Respond to this email if you have any questions about any of the programs. I’m happy to chat!
