How to Evaluate Your Profit Margins
Your company might be worth more than you realize or might be losing profit in a particular area. There are some calculations you can perform to determine your profit margins. These calculations can also reveal areas of high product demand or where operating costs are impinging on your profit.
One of the simplest ways to determine a basic profit margin is to perform a breakeven analysis. In a breakeven analysis, you compare the ratio between your operating expenses and your net income. If your income is above your operating expenses, you have a positive profit margin. A breakeven analysis can be used for many calculations in business, from comparing products to determining how many products you need to sell to make a profit. This type of analysis can be difficult when calculations become more complex or companies have multiple product lines.
Gross Profit Margin
Gross profit margin can be another method to ascertain your profit margins. The cost of your products or services can be subtracted from your total sales revenue to determine gross profit. The gross profit margin is calculated by dividing the total from your gross profit by the total of your sales revenue. The gross profit margin is limited because it does not take your other business expenses into account, such as employee salaries, rent, or utilities.
Product Line Comparison
Some products and product lines may sell at a much higher rate than others. A product or service line comparison can determine which products sell the most and which products may need consideration. Product line comparisons can utilize many of the other types of calculations to analyze how each product line performs.
Comparative Expense Analysis
One of the more extensive types of analysis you can perform is a comparative expense analysis. This analysis compares the total operating expenses for multiple years. Comparing the operating expenses from one year to another can reveal areas where your expenses may be exceeding your revenue. Increases in operating expenses may line up with company growth and customer demand or they may help you decide if you can cut back in certain areas.
Net Asset Inclusion
Calculating your company’s net assets into your gross profit can also indicate the profitability of your company. Even if your company is not showing a profit or is close to even in the breakeven analysis, your company’s net assets may be calculated into your profit to show your company’s net worth.
It may be wise to do these calculations at regular intervals during the year, such as once a month. Each analysis can help you examine your profit margins and areas where you can improve your net profit.