The primary element of making your business a success is knowing and understanding your financials. Unfortunately, many business owners struggle to understand all the different aspects of their financials. Where you may have experts assisting you with tracking different data, you might be unclear what to ask them to produce. Tracking profit margin might seem like a minor part of your financials for example. There are multiple benefits to tracking your profit margins and today, we at Mark Dicus & Company would like to discuss the this further.
Profit VS Profitability
Before diving into the profit margins, it is important to distinguish the difference between profit and profitability. Though they are different, profit and profitability are used interchangeably. After subtracting the total expenses associated with a business from its total revenues, profit is the amount left. The ratio between the net income and total sales, often measured as a ratio or percentage, on the other hand, is profit margin. To help you to gauge your company’s ability to make a profit is from determining your profit margin is just one of several profitability ratios. Although most consulting accounting firms tend to focus in on the net profit margin, there are several types of profit margin. Below, are the benefits of tracking your profit margin.
Discovery of Minor Cost Shifts
To determine if your business is yielding a financial gain, tracking your profit margin is highly effective. In order to compare and contrast a number of areas in your business, you are essentially using profitability or profit margin, this permits you to find areas that may be draining the profit from your business. Your expenses against industry standards can also be assessed. You can pinpoint expenses to increase profits if you notice a ratio is significantly higher than the industry standard.
Realistic Viewpoint of Business Health
Here is the analogy: Business A makes $100,000 in net revenue after 1 million in total sales, whereas Business B generates the same $100,000 in net revenue but does it with just $500,000 in sales. Even though they made less in sales than Business A, Business B has a higher profit margin as a result.
Where both businesses were profitable, Business B is clearly doing a better job of managing expenses and is in a healthier position than Business A. Without looking at profit margin, it may not be so obvious, however.
Discover Negative Expenses of Your Business
Allowing you to start drilling down into your expenses, profit margin gives you a clearer picture of the financial health of your business. Though you also need to manage the related expenses that come with increasing sales. To manufacture and find areas where costs can be reduced derives from the process involving assessing how much each unit costs for your business.
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Ultimately, tracking your profit margins allows you to better determine the financial standing of your business, where you can help minimize the negative impact, and enhance the positive aspects of your business financials. To help you better understand your accounting and business finances, call Mark Dicus & Company!