The great businessman, Michael Dell once said this about his business: “We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”
When it comes to keeping track of your cash flow, line items like payroll, manufacturing, shipping and so on all go in to determine your bottom line, i.e. your profitability.
Understanding your profit margin is key to reaching that profitability and hearing that oh-so pleasing cha-ching in your pocket! Even if you are already rolling in it, you can always stand to 10x it, right? So, for you, in that case, improving your already robust profit margin is your obvious next step. Whether you are an absolute newbie or on your way to the Entrepreneur Hall of Fame… Profit Cyclops is definitely for you…
What is a profit margin?
That, in its simplest terms, is the percentage of profit from each sale. So, as an example, a 50% profit margin means that for one dollar of sales, you earn $0.50 in profit from that sale.
Time to warm –up those math muscles with a little equation action. Here’s the basic formula for overall profit margin:
Profit Margin = (Net Income/ Revenue) X 100
Your net income is net sales or revenue minus expenses. Then divide this net income number by your net revenue and multiply that number by 100 to get your profit margin. See, Mrs. Jones, your old math teacher, would be so proud of you!
How to gain an understanding of your business’s profit margin
You have calculated your profit margin. Congrats! That’s the first step. But only the first one. Now you need to get a firm grip on your profit margin so you can get a clear vision of the next steps: product pricing, inventory circulation, marketing, etc. With a low-profit margin, you may need to adjust one of these aspects of your business: raise your prices, add to your inventory, create some promotions…
But what makes a ‘great’ or a ‘terrible’ profit margin? Just a ‘good’ or a ‘bad ‘ number? Hard to say at first glance. It varies according to your product, industry, market, location, and the season for starters. What may seem like a low-profit margin for one of those indicators may be high for another. The average grocery store has a profit margin of just over 2%, while a restaurant could reach as high as 15%. And within each of those, each proprietor knows what their loss leaders and cash cows are.
For the US, 50% or so is the average profit margin for retail. Results may vary and it all depends on the product, industry, market, season, etc. Researching similar businesses in your area is always a good idea to help you get a handle on what kind of profit margin you are looking at.
Maximize your profit margin in 3 easy steps
1. Increase your prices
It might seem counterintuitive, especially when your sales are down, but raising your prices can be a sure way to increase your profit margin. It is well-known among sales gurus that people tend to value a thing based on its price and this little quirk of human psychology can help your business flourish.
How much you should raise your prices is a matter of careful consideration. Your pricing strategy is based on how the economy is going, what your competitors are doing ( or not) and what customers are paying. You’ll want to complete a competitive analysis whereby you find out what your competitors are doing with their prices. You need to find that Goldilocks sweet spot: not too high, not too low, just right!
Once you have the pricing dialed in, you need to be thoughtful about how you raise your prices. Ease your customers into the new you. Help them understand how much more value you are delivering by using your top-selling cash cows to lead the way. This will help you push up your profit margins and take the pulse of your customers.
2. Manage your inventory
What you have in your inventory can make or break a business. Your inventory should run out the door briskly like a clear mountain stream rather than stagnate in your stockroom like a fetid swamp. While you may need to drain a swamp at some point, the markdowns that follow can result in a downturn in your profit margin. To keep your inventory fresh and your profit margin high, employ an inventory management system.
When you know what you have in stock and how fast it’s leaving your shelves, you can stay on top of your purchasing and sales. But markdowns happen, even to the best businesses. When you have got to slash your prices to make room for new products, these points will ease the pain to your bottom line:
Ultimately, you have to pour your efforts into what brings in sales in order to maximize your profit margin.
3. Lower your purchasing costs
Another way to maximize your profit margin is to reduce your purchasing costs from your suppliers. In other words, just as you offer a discount to your precious customers, you can ask for a discount from your vendors and suppliers. You may even consider finding other vendors or otherwise revamping your supply chain.
As the saying goes, ‘Everything is a negotiation,’ so you too can renegotiate with those vendors in your supply chain. As a valued customer, you can use this leverage to get your suppliers to keep you happy by lowering their prices or sweetening the deal with some additional units you can sell. You understand that size matters so ordering in bulk can reduce your price per unit. You may even go in together on an order with others or create some sort of buying co-op group to get the best bulk discounts available.
Next, look for other wastage in your supply chain. Seek to streamline any process in your supply chain by asking suppliers how the process can be simplified or made easier. Perhaps there are ways you can automate the ordering process. Look for discounts in shipping such as receiving more in one order but shipping less frequently to lower the cost. Once you start looking at your purchasing in this manner, you are bound to find savings that will increase your profit margin.
In the red? Or in the black? What color is your bottom line?
The key to building the business of your dreams and living that dream is found by growing your profit margin. Payroll, product inventory, and overhead are just a few of the elements that work in favor (or against) your bottom line. Let Profit Cyclops make light work of that profitability through its Amazon Profit Calculator. Profit Cyclops crunches the numbers in 3 areas: profits, products, and inventory, allowing you more time to get down to business and maximize your profit margin.
Watch your orders pour in through our innovative dashboards, compare profitability throughout months and seasons. Analyze your ad spending, storage costs, return rates and inventory levels all in one place. While others must download reports, comb through every fee and try to make sense of them all. We will show you an item by item breakdown of these fees so you can always focus on the big picture.