Profit margin is among the most commonly-used ratios to calculate a business’s profitability. A small margin means more sales are required to increase profits. For example, if a business reports a profit margin of 25%, that equates to a net income of $0.25 for every dollar in sales.
A business’s profit margin is used by creditors and investors to gauge an entity’s financial health. A healthy profit margin reflects on a company’s financial health, its potential for growth, and the skill of its management (whether that’s a sole business owner or a leadership team).
Once your business has calculated your profit margin, it’s also important to see how your business stacks up against other competitors in your sector. If, for example, you are a construction company with 25 employees, it wouldn’t make sense to compare your profit margin against a retailer like Target or your favorite local restaurant. Compare against similar organizations in your sector to get a better idea of where your company’s profit margin falls.
What is my current profit margin?
Common Business Terms
Below are some common terms that may apply to your business, so be sure you are familiar with them before starting your profit margin calculations to make the most of your analysis.
- Product Name: The name of the product for this entry line. This will appear on your printed report with your results.
- Wholesale cost: Your total wholesale cost of the product that you are going to resell.
- Markup percent: The percentage of your wholesale cost that the product’s price is increased by to determine the selling price for your customers. For example, if you have a 50% markup on a product with a wholesale cost of $10, your selling price would be $15.00.
- Selling price: This is the price you charge your customers. This amount is always calculated, based on either the entered gross margin percent or markup percent.
- Gross margin dollars: This is the total gross margin, in dollars, for your product. For example, if you have a wholesale cost of $10 and a selling price of $15 dollars, your gross margin is $5.00.
- Gross margin percent: This percentage is the gross profit for your product. For example, if you have a product that has a wholesale cost of $10 and a selling price of $15, your gross margin is 33.33%.
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