For many small businesses, profit margin is the difference between success and failure. It's the amount of money left over after all of your sales expenses and operating costs have been paid for and it is expressed as a percentage. Learning about profit margin and how to create a healthy margin in your business from the start can help you in your business endeavors. What is a reasonable profit margin for a small business? Well, it depends. In this article, we'll discuss profit margins and ways for your small business to increase them if needed.
What Is a Profit Margin?
A profit margin is a way to compare your revenue to your expenses. It is the difference between revenue and cost of goods sold. The higher this number, the better. It's a measure that shows how much of each dollar you make on each unit of product you sell. For example, if you make $100 in revenue and spend $80 to produce your product, then your profit is $20 (100 - 80 = 20).
Some people think that big businesses automatically have a huge profit margin. But sometimes the average small business profit margin may actually be larger than those big businesses. Remember, it’s not about the total revenue, but instead, how much you make after all expenses are paid. The big business may depend more on the quantity of products sold, and not rely as much on a big profit margin.
How Is a Profit Margin Calculated
You’ll need to use a formula to calculate gross profit. This formula is:
- Gross Profit = Revenue – Cost of Goods Sold
You take that number and divide it by the net sales to get the profit margin. For instance, in the example of a $100 product that costs $80 to produce, the profit margin ends up being 20%, or $20/$100. As you do this for each of your products in your company, you can determine if that margin is high enough for you and your business needs. What is the difference between revenue and profit? Revenue is how much money is coming in from your sales, profit is what’s leftover after you pay for the cost of goods sold and other expenses.
Industries With the Highest Profit Margins
Many industries have very high profit margins. Industries with the highest profit margins include trusts and estates, land leasing, and cigarette and tobacco manufacturing. Professional scientific and technical services were also found to have a high level of profitability. When you’re considering what field to go into or where to invest your money, looking for the best profitable small business is important.
Industries With the Lowest Profit Margins
In general, business types with the lowest profit margins are furniture stores, home health services, recreation services, and travel. While it’s possible to make money in these industries, it’s important to streamline your business as much as possible to ensure that you are yielding a profit. What is a reasonable profit margin for small business operations in these industries? In some cases, it could be as low as 2%-4% after all expenses and overhead is paid.
How to Increase Profits for Small Business
If you want to increase profits for your small business, there are four main ways to do it. You can increase sales, increase prices, increase productivity, and reduce costs. To increase sales, you can do this by expanding your customer base or increasing the volume of sales with existing customers. There are upsells you can do to help even when you sell products online. You can also increase productivity by improving training or buying new equipment.
Financial Assistance & Loans
One of the things that newer businesses often forget is that you can leverage loans to help you improve your profitability. Let’s say that you order 100 products to resell and it costs you $1 per unit. But if you order 5,000, it costs you $0.50 per unit. You’ll increase your profit margin significantly if you can purchase these items, materials, etc. in bulk.
If you get a loan to pay for the added cost of buying 5,000 units, you’ll be able to sell them at the same price and make more money on each sale. When you’re considering what is a reasonable profit margin for your products, this can be a valuable strategy.
Small Business Loans
You can also use loans to expand your business. Loans can be used to purchase equipment and other assets, hire employees, market your products and expand the business. Small business loans are a powerful tool when used right and can free up your cash flow and make it easier to operate your business.
Revenue advance is a form of financing that allows you to get paid upfront for the work that you do. Revenue advances can be used to pay for expenses such as advertising and marketing, salaries, rent, utilities, and more. When you pay the loan back, you agree to pay a certain percentage of your revenue going forward until the original loan is paid off.
An installment loan is a type of debt that is repaid in monthly installments. These types of loans are available for both credit cards and personal loans and have various features, including fixed or variable interest rates, varying amounts and repayment periods, as well as more flexible repayment plans. People often use installment loans to buy equipment, pay for vehicles, and purchase land assets.
As you can see, some companies run on a very slim profit margin, while others have high margins. The profit margin for small businesses is a very important financial indicator. It tells you how much money your company is making, and it allows you to compare yourself against other businesses. If your business doesn't have a good profit margin, then it may be time to do some research into changes you need to make to help increase that number. If you need more money, Fora Financial can help you with many different loan options so you can work to increase your profitability.