The better you know about your finances, the better you get at managing your business.
Everyone knows how to calculate profits, but just focusing on it can be deceiving, as profits do not signify profitability.
Profit is the amount left after deducting expenses from revenue, and profit margin is the ratio between income and sales. When you need to find how much money is left, you calculate profits. But when you want to know how well your business is doing in terms of expense management and handling revenue, you calculate profitability.
A business should not just keep track of the profit margin but aim to continuously improve it. If the profit margins are not improving, chances are that the business is not growing.
Here’s why you should keep track of the profit margin:
- Just keeping track of the profit can be deceiving. For instance, two companies can generate the same amount of profit but not be equally profitable.
For example, company A is selling goods worth Rs 90,000 after spending Rs 1,00,000 whereas company B is selling goods worth Rs 40,000 after spending Rs 50,000. Though the profit earned by both the companies is the same i.e., Rs 10,000 but the profitability differs.
- Profit margin provides a more realistic view of the business. It is measured in percentage and is the ratio between total sales and revenue.
For example company A is having a profitability ratio of 10% and company B is having a profitability ratio of 20%.
Here are a few ways to increase your profit margin:
- Increase your prices to widen the profit margin.
- Build a healthy relationship with suppliers and vendors.
- A shift from general discounts to personalized offers.
- Train your team and motivate them to perform better.
- Create an emotional connection with customers.
- Streamline the process and reduce the expenses.
If you are still struggling to understand the different aspects of finance or not sure about how to keep track, you can consult professionals. We at BFAG has a team of finance professional who can help you out all the finance and accounting related problems.
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