Helping eSellers to understand their business’s profits and how to install best practice to affect them.
“Gross margin helps a company work out how much money it keeps after incurring the costs related to making the product it sells and/or the service it provides.”
Your business is likely going through a few stressors right now, like tackling cash flow management, keeping customers happy, and finding ways to increase profit.
When it comes to improving profitability, managing and increasing profit margins are key to your company’s financial success. It’s an essential small business accounting strategy for those wanting to run a successful business online.
The only problem? Understanding profit margins is difficult. It’s easy to get lost trying to figure out profit margin ratios, operating profit margins, net versus growth, and more. It can be tricky to overcome the information overload and actually learn how to increase profit for your business.
Over our next three blogs we’re going to address the big profit question, and ask and answer the following:
What is gross margin?
What is a good profit margin?
What is a good gross profit margin?
How to increase profit margin
Finding the ideal profit margin for your business
Profit margin FQA
So, let’s start:
What is gross margin?
Gross margin is the difference between a company’s revenue and cost of goods sold (COGS) divided by revenue. It’s shown as a percentage.
Gross margin helps a company work out how much money it keeps after incurring the costs related to making the product it sells and/or the service it provides.
The formula for gross margin is:
(Total Revenue – Cost of Goods Sold) / Total Revenue)
The higher your gross margin, the more money a company keeps on each dollar of sales. Higher margins can indicate whether your company is running a profitable operation and if sales are good.
What is a good profit margin?
If you’re asking yourself, “What is a good net profit margin?” then you’re on the right track. It’s safe to say that a good profit margin for your company depends on your location, industry, and personal circumstances.
For example, in 2019, industrial banks had the highest reported profit margin, with an average of 51.8%. While average profit margins in manufacturing hovered around 8.5%, according to the same research.
Retailers usually have a low profit margin compared to other sectors:
Brick-and-mortar retailers tend to have profit margins between .5 and 4.5%.
Web-based retailers generally have higher profit margins, while building supply and distribution retailers have the best margins—reaching as high as 6.5%.
The rise in shopping online has played a big role in keeping retail margins low. As a general rule of thumb, a 10% net profit margin is deemed average, while a 20% margin is deemed high and 5% low. If you want to compare your company’s performance based on profit and merchandise margins, check out the average profit margin for your industry.
That’s it for this blog – we’ll pick up on what a good gross profit margin looks like in our next blog.
Profitizer is a new app that’s coming soon – and it’s the only way to truly measure, monitor and report on the financial performance of your eCom business – both sales and PROFITS!
So head on over to www.profitizer.appand take a look. You’ll be able to sign up there to receive updates as the app develops and become part of the Profitizer tribe.
And if you sign up there’s a freebie too – we’ve designed a simple tool to help you assess the profitability (or otherwise!) of any individual product. It’s yours to enjoy.
