As an entrepreneur Go out and build a legacy, You may be able to sell products in your sleep. Literally.If you set a Passive income inflow, Your bank account grows overnight. Rather than “rising and sharpening”, it is more like “sleeping and harvesting”.
However, becoming a successful business owner is not just about exchanging goods or services for money. You must ensure that your expenses do not erode your profits too much. When your profit margin is high, your business opportunity level is also high. On the other hand, lower-than-average profit margins can cause trouble.
Understand the importance of profit margin formulas
Knowing how to calculate profit margins is an essential arrow in your quiver Manage your business. The formulas you use to measure and track income, expenses, and other important components are called key performance indicators (KPIs).
The effective use of KPIs is similar to what healthcare professionals do for you in biometric screening. Suppose you want to see your doctor for a comprehensive physical examination every January. Screening may include body mass index (BMI), blood cholesterol levels, and blood pressure measurements.
These indicators can be regarded as KPIs for your body, and the doctor will evaluate them and then alert you if any problems arise. For example, if your blood pressure is 140/90 and not just a simple number, the level will indicate a health problem that may require treatment or medication.
Similarly, KPIs can provide insight into the health and performance of your business. Just as abnormally low blood pressure can have a knock-on effect on other areas of your health, low profit margins can damage all parts of your business and ultimately make it difficult for you to succeed.
But the truth is that most of us don’t like to see a doctor. Many entrepreneurs have adopted a similar approach to KPIs such as profit margins. As business owners, they have great ambitions. But they don’t want to worry about the nuts and bolts needed to transport them there. In these situations, ignorance is never a blessing. What you don’t know will inevitably lead to your downfall.
As Ivan Kreimer explain:
When you first start an online business, it is easy to fall into lofty goals. You want to launch multiple products. You want to expand to different international markets. You want to sell a comprehensive solution at a low price. However, these goals may overlook the required financial infrastructure. Dreams are beautiful, but reality will soon collapse. You need to have a strict budget to define the natural limits of your business so that you can actually grow as resources allow. You need to be aware of your limits, even if it is not interesting. This pragmatic mentality will help you develop your business on a solid foundation.
By continuously tracking your KPIs, you will have better control over the daily functions of the enterprise and better control its destiny. It won’t take long for KPIs to become a second language. It will be easier to evaluate them and gain insights.
Here are 11 KPIs you should consider including:
- Gross profit margin
- Net profit rate
- net income
- Quick ratio
- Budget and actual
- Operating cash flow
- Average customer acquisition cost
- Funnel flow
- Customer retention
- Customer Churn Rate
- Year-to-date sales growth
Maybe your business structure makes one or two of these KPIs less relevant. But you can actually guarantee that you will want to make KPIs related to profit margins your top priority.
How to calculate profit margin
What is a good profit margin? The answer depends entirely on your industry. It is important to understand the average profit margin of your own business, for example, and use it as a benchmark. Of course, unless you know how to calculate gross profit margin and how to calculate net profit margin, this information will not do you any good.
Net profit margin formula
Using the net profit margin formula, you can understand the income and expenses of your business.Because you can have Record revenue, But if accompanied by the same high cost, the impact will be minimal.
Use this formula to show your net profit margin:
(Net profit ÷ net income) x 100 = net profit margin
The ratio you get from this formula tells you the percentage of profit your company earns from total revenue. A higher percentage means that your operations are running smoothly, and a large portion of every dollar you get from sales is retained. A lower percentage indicates inefficiency that hurts your bottom line.
Gross margin formula
To understand the broader business scope, you need to use the gross margin formula. This tool can help you measure the effectiveness of pricing strategies, production processes, and manufacturing efforts.
Use this formula to show your gross margin:
Gross profit ÷ total revenue = gross profit margin
This KPI shows how much sales revenue is left after you subtract the cost of goods sold. You will use part of the remaining funds for research, development, management, salary and marketing expenses.
Operating profit margin
After dealing with costs such as materials and wages, use this KPI to measure your profit per dollar of sales. Please note that this indicator does not include taxes and interest fees.
Use this formula to show your gross margin:
(Operating income ÷ net sales) × 100 = operating profit margin
this The healthiest company The operating profit margin has steadily increased, with periods of steady and decline from time to time. When recession becomes more common and obvious, prosperity is impossible.
With all three formulas, the key to understanding what a good profit margin is is to understand the average value of your industry. Here is a quick snapshot of some companies with high profit margins:
- Business courses
- Bookkeeping and accounting
- Business Consulting
- Marketing copy
- graphic design
- Social media management
- Food truck
- IT support
- Children’s application
- Language courses
In contrast, corporate profit margins in the following industries are generally much lower:
- grocery store
- Dinning room
- Medical device manufacturing
- Real estate services
- Entertainment service
- Elderly facilities
- Assisted living facilities
- auto dealer
Operating in an industry with low-end profit margins is not necessarily a problem. You only need to do research to understand the average profit margin of your competitors.Using this baseline, you can measure the effectiveness of operations and accurately Develop a growth strategy.
Effective use of profit margins and other KPIs
Every business needs goals to guide its development. These goals are executed through various tactics and strategies. However, if there is no data to provide them with intelligence, it is meaningless to throw words like “tactic” and “strategy” that sound important.
This is where your KPI comes into play.
The knowledge you gain from profit margin formulas and other KPIs should serve as your North Star. Of course, you can make plans without them. However, when you operate intuitively, it is easier to miss your destination.
Some companies view KPIs as an annual event, similar to the annual company picnic in the summer. Nothing is far from the truth. You need to proactively check these different indicators so that you can anticipate problems and make necessary adjustments.
Wealth not only favors bold people—it favors those who are knowledgeable and prepared. Once you have collected the correct data, please go ahead and try. Take that moon landing plan. Just realize that without enough training and years of research, no astronaut has ever attempted to land on the moon.
When your business is in its infancy, there are fewer indicators to consider. But don’t be too satisfied with your limited set of KPIs.If you are a Growth entrepreneur, There will be expansion in the future.
“For many entrepreneurs, this is an often overlooked and scary part. Finance is the lifeblood of making your business run smoothly,” insist Ivan Kramer. “You want to make sure that as your business grows, your financial situation also grows.”
Since you will add new KPIs in the process, it is important to understand how to choose the right KPI. The profit margin formula is non-negotiable, but what about more ambiguous choices (such as the offered sales offer, the win rate of opportunity value, or the impression-weighted quality score)?
Here is a test to consider: Is this KPI related to one of my company’s strengths, one of my company’s weaknesses, or where do I want my company to go? If your answer to one of these questions is “yes”, then KPI is a strong competitor for your financial tracking. If you answered “yes” to two of these questions, then there is nothing to argue about. You have identified a key KPI that will help you improve the operability and measurability of your goals.
Don’t leave your business plan behind
When you use data and experience to guide your business development, it will naturally deviate from your business plan in some ways. This will not invalidate the forecasts and goals you outlined in this important document. This simply means that you are creating a dynamic business that is more influenced by data and customers than initially planned.
This is a mature and complicated way to handle your business. The rewards can be huge.
Be sure to make your business plan a dynamic document that grows with your business. You should use it in conjunction with KPIs instead of stuffing them into filing cabinets. When the data confirms all aspects of your plan, you can proceed more boldly. When new information prompts changes, make the necessary updates to your plan.
There should be a symbiotic relationship Your business plan And the metrics you are monitoring. This method not only keeps your business adaptable, but also prevents the embarrassing situations that sometimes arise when entrepreneurs who ignore their business plans seek financing. Inevitably, the lender will require a review of the business plan as part of its evaluation process. Unfortunately, that old dusty document is difficult to resemble the direction and direction of business development.
As you can imagine, these types of disconnects are not welcome By the lender. They are looking for organized and dedicated business owners.
When you incorporate profitability and other KPIs into your leadership style, almost every aspect of your career will get better. You will know where you are from, where you are now, and where you are going.
Of course, running a successful business requires more than just KPIs. This is why we have gathered some top entrepreneurs from various industries to share their proven strategies.
In our library of free courses, you will learn how to identify products that will become your best-selling products, how to negotiate better deals, how to increase profits, how to attract new Instagram followers, how to strengthen your marketing efforts YouTube, and how to change Effectively target your advertising efforts.
Most importantly, you should check Founder financing Lessons from Alexa Von Tobel. You will learn how to keep more of the money you earn and manage your finances in a way that most entrepreneurs will take decades to master.