If you want your business to be successful, it needs to be profitable. And if you want it to be profitable, you need to know and understand a little something called profit margins. After all, if you aren't bringing in money, the bills don't get paid, and that story, my friend, is one that never ends well.
In very simplified terms, a profit margin is a percentage of how much profit your business generates per dollar of sale. Example: If you have a 30% profit margin, it means you're netting $0.30 of income on every dollar.
To arrive at this percentage, start with your revenue and deduct the total cost of goods sold, expenses, interest, and taxes (Your net income). Divide that number by the original revenue amount, multiply by 100, and alakazam, you have your profit margin and a clear picture of how your business is fairing.
As a business owner, it's important that you get - and stay - very, very familiar with your profit margins. We're talking-Tommy Lee and Pam Anderson with a video camera-familiar. There shouldn't be any secrets or surprises. Having this kind of familiarity will enable you to make wise and rational decisions when it comes to protecting the profitability and sustainability of your business, as well as course-correct when you see that percentage slipping. Your margins should act as a metric but also something you use to analyze and evaluate.
How can you improve profit margins?
Don't fall into the trap of thinking, "if I just sell more, I'll be fine." That might not actually be the real issue if you're hemorrhaging money elsewhere. Instead of just slapping a bandaid on the problem and praying it goes away, here are some useful tips to help you mind your margins.
Big, sweeping changes aren't always necessary to improve your profit margins. Some of the examples we shared above will require a bit more legwork than others, but instituting one or two of these can significantly impact your bottom line. Minding your margins should be a regular practice if you're serious about growing and sustaining your business.