Track Your Profit Margin

by Craig Anthony

1 min read

If you want to know if your business is successful, tracking your revenues and expenses alone can be misleading. Imagine Company A has a total revenue of $100,000, and in order to make this amount of money, it has to spend $90,000. Now Company B’s total revenue is $50,000, but its total expense is just $10,000. Despite having a lower revenue, Company B is clearly more profitable than Company A. But how much more profitable is Company B? Profit margin measures a business’ ability to turn each dollar of its revenues into profits. It is expressed as a ratio of net profit to total revenue and provides a realistic idea regarding the profitability of a business. The profit margin of Company A in the previous example is $10,000/$100,000 or 10%, while that of Company B is $40,000/$50,000 or 80%. In other words, for each dollar of its revenue, Company B can make a profit of $0.80. One way to increase the profit margin of your business to increase your revenue. You can do so by raising the price of your products or services. You don’t have to increase your prices across the board, as this might drive your customers away. Instead, you can focus on your more popular products and raise their prices. Another way you can improve your profit margin is to lower your expenses, such as travel expenses. This may be a safer way to increase your profit margin because it usually doesn’t affect your customers directly. By monitoring and continually improving the profit margin of your business, you can make sure that it is profitable in the long run.

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