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Geez That’s Marginal | Empire Accountants Brisbane

Posted 15 Nov '17

So what’s your Profit Margin..?

Do you know… Should you know…?

The straight answer is YES. You definitely should, most importantly so you know how much you need to sell to hit your goals.

Knowing whether you’re making money is important right? We think so! So here’s all you need to know on your profit margin…

What is your gross profit margin?

Your gross profit margin shows whether the mark up on your products or services is enough to cover the cost of your direct expenses.

To determine what your gross profit margin is you need to first calculate your gross profit. Simply by answering two questions:

First Question – How much does it cost you to make the product you sell?

Second Question – How much do you then sell that product for?

For example, let’s say you make candles. You know it costs you $10 to make a candle, and you sell them for $50. This means for each product you sell you get $40 to go towards running your business and ultimately you. The gross profit margin on this is then a 80% margin.

Why should you know your profit margin?

The end result is ultimately so you know how much you need to sell to hit your goals!

Using our candle example above, the profit margin made on candles was 80%. Which is a good result.

Why? Well say you know that it costs you $20,000 to run your business and you want to pay yourself $50,000 along the way. The BIG question of the day is, how many candles do I need to sell to reach this goal?

By knowing these 2 very important elements (i.e. Your GOAL and Your MARGIN) we can calculate how many candles you need to sell.

Example continues…

You want to hit $70,000 in profit with a margin of 80% – this means you need to sell $87,500 worth of candles, if you sell them for $50 each – this means 1,750 candles total. If you are trading 50 weeks a year, open 5 days a week then you only need to sell 7 per day on average…achievable? Helpful to know…? I’m hearing a big old Yes please!

Example continues on and say if it was in the reverse…it costs you $40 to make a candle and you sell it for $50. This means your profit margin is 20%…(not so good). Your goals are the same and you want to hit $70,000 profit.

So with a goal of $70,000 and a margin of 20% – this means you need to sell $350,000 in candles ….woah! Which means 7,000 candles total in a year, back to the daily figure of 28 candles.

Four times the amount of candles.

That one little margin makes so much difference.

By knowing your gross profit margin you can begin to see what products/services make you the most profit, what is worth pouring your energy into and what may need to be culled or improved. Ultimately creating the foundation of your future marketing activities, staff focus and daily operations.

How to apply this to your business

Knowing and understanding your numbers is so powerful in helping you reach your business goals.

Please call us today and simply say, I want to know my profit margin and we shall help you put these numbers to use! 07 3124 0244

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