Profit margin calculation is crucial to find out a company’s financial health, sales growth position, expenses and to evaluate present growth plans.
Small businesses seek ways to increase revenue. However, many businesses just ignore calculating their profit margin, which is an essential figure to chalk out a different strategy to increase the bottom line. In fact, by telling a company’s profit margin, you can gauge how efficiently it is using its resources. You can use online profit margin calculator to have a quick view of your company’s present profit margin.
So, what exactly is profit margin? Profit margin is a ratio of profits to overall costs incurred over a period such as a quarter or a year. Profit margin is categorized as gross profit margin and net profit margin. Gross profit margin is calculated on a singular product or services whereas net profit margin is usually arrived at to determine profit margin of an entire organization.
How to calculate profit margin?
Gross profit margin is calculated by subtracting total expenses from total sales of a company and then dividing that amount by total revenue. For example, if a company sells an item for $25, and it costs $20 to manufacture that product, then the gross profit margin on the product will be $25 – $20 =$5 divided by the retail price $25 = 20%.
To find out net profit margin of an organization, you need to take into account its total sales for a certain period as part of profit margin formula. Then subtract total expenses and then divide that amount by total revenue of the organization taking help from a gross profit calculator. For example, your company generated $10 million in sales and operating expenses were up to $5 million, then net profit margin can be arrived at by subtracting operating expenses from total sales revenue [$10 million – $5 million = $5 million]. Then divide the remaining amount of $5 million by sales revenue of $10 million that would be 50%, which is net profit margin of your company. You can use gross margin calculator to calculate bigger amounts.
Business owners use net profit margin to find out the areas where they should be improving. They can evaluate a service or product that is not working well for business so that a new strategy can be planned. You can also uncover an expense that are lowering your profits. Profit margin also let you know if you should increase your prices or not.
With the help of net profit margin, you are able to determine your new sales goals. So, if the margin is growing, you can explore new sales growth opportunities.
If net profit margin is lower than expected, then your company should devise new plans to cut expenses so that profit increases.
However, to get accurate net profit margin, it is very important that your company take into account every expense and every revenue source in the total. For accurate calculation, you can take help from free profit margin calculator.