What is my business profit margin? How do I calculate it?
When you talk about margin, you’re looking at a percentage that represents a relationship between two numbers. You may hear profit margin also called a profit margin ratio. Both of these terms are referring to a percentage and can be used interchangeably.
When you start an interior design business, you want to know the total amount of money you get to use to run your business. Of all the money you’re taking in, how much goes towards running the company? You feel safest when you know that this amount is enough to keep you afloat or, even better, grow more profitable.
So, it’s not enough to know the total amount of money you get to keep because you need to know if this amount is going to be enough to stay in business. It’s the number and the relationship of that number with the others in your financial stack that will determine the state of your success: are you doing well, or are you in trouble?
Profit Margin Formula
To calculate your Gross Profit Margin, you would be comparing the Gross Profit amount to the total income amount. This comparison would provide a percentage known as a margin. The Gross Profit amount is the dollar amount after the Cost of Goods is removed from the Total Income.
Here is the gross profit margin formula: Gross Profit amount divided by Total Income amount
Example: If Total Income is $50,000 and the Gross Profit is $18,000 and you want to know the Gross Profit Margin (GPM), you divide: 18,000 by 50,000. The result is 36%.
This means that your Gross Profit Margin is 36%. Thirty-six percent of every dollar that comes into your business is used to run the company and cover all company operating expenses. Including your salary and profit.
Difference Between Gross And Net Profit Margin
So, you ask, what is the difference between gross and net profit margins?
Both are percentages, but they are measuring two different things.
The Gross Profit Margin (GPM) is measuring, as described above, the relationship between the gross profit amount and the total income. This results in the amount of money flowing into the company for company use.
The Net Profit Margin (NPM) is measuring the relationship between net profit and total income. Net Profit is the resulting profit after the company expenses (operating expenses) are removed from the gross profit. So essentially, we take the gross profit, remove all company expenses and what is left over is the net profit amount. We then compare this to the total income.
Gross Profit Margin (Ratio) = Gross Profit divided by Total Income
Net Profit Margin (Ratio) = Net Profit divided by Total Income
Practice the Calculations
Start slowly. Run your Profit and Loss statement for the year. Do these two calculations. Run it for last year, calculate and compare. Run it for every month in this year and see which months are different.
Do you see trends? Do you have a positive net profit? What do you feel about these numbers?
In the next blog post we will dig in a bit more. If you need assistance understanding your financials, join The Designers’ Inner Circle where we work with you to determine your numbers and if they are sufficient to run your company. Our goal is to empower you to make the numbers work for you not against you.
Are you hungry for more? Subscribe now to receive two free coaching emails per month, personally crafted by Michele! Delivered every two weeks, these emails are packed with valuable insights, actionable strategies, and thought-provoking ideas to guide you on your business transformation journey towards greater success.