Calculating sales margins is an important and exciting part of running a business. The sales margins tell you if you are profitable and by how much. It can help you determine which products and services are working and what needs to be changed. Calculating sales margins is also a way to help you measure whether the cost of doing business is increasing or decreasing. There are three things you should know when calculating your sales margins.
You have to keep accurate accounting records. In order to calculate the true sales margins of the company as a whole, or a specific product, you need to know the gross profit and the net profit of the business. The gross profit, also known as total revenue, is simply any money that has come into the business as a result of the product or service being sold. The net profit takes all the expenses of the company into consideration. In order to determine net profit, you subtract the total cost of doing business from the gross profit. Once you have the gross and net profit numbers available, simply divide the net profit by the gross profit to determine the sales margin. The only way to determine an accurate sales margin is to start out with accurate numbers for the gross and net profit. Whether you keep the records yourself, or hire and accounting agency, accuracy is imperative.
You should be calculating sales margins at the beginning and end of the sales process. Calculating sales margins at the pricing part of the sales process will help you determine the price that the market will support for your product or service and project profits. Each market has a range of margins that are considered typical and you must take that into consideration. For example, the margins are smaller in highly competitive retail markets such as groceries and larger in service based markets such as home and office cleaning services. If you do not take the time to project sales margins at the beginning of the process, you run the risk of pricing your product or service in a way that is not supported by the market. Calculating sales margins at the beginning of the sales process also allows for you to project future profits, which is an important part of planning for the future of your business.
Calculating sales margins after the product or service has been purchased allows you to understand the true cost of doing business. When you are pricing an item or service, the process of calculating sales margins is a projection that cannot fully predict all future costs associated to the business. There are a range of expenses related to doing business which can include marketing, product purchase, and employees to name a few. All of the factors related to the cost of doing business must be considered in order to accurately begin calculating sales margins.
You need margin in your business. It may seem tempting to make your margins as thin as possible, especially as a startup or in a saturated market. It is important to get some of the market share, and thin margins are one way to attract customers. However, margin is essential to the longevity of your company and to your ability to serve customers. Take some time to research the typical margins in your industry and location. Aim to establish your margins at a level that will be supported by the market. Once your margins are established, get busy doing what you do best-providing an excellent product or service to your community.