Maintaining a business's financial health requires a lot of hard work and dedication, especially during the initial stages of growth. There are many indicators that must be considered when making every decision. Among them, calculating profit margin is one of the most important.
Simply put, this margin represents the percentage of your revenue that translates into real profit for the company, after deducting all costs. Knowing how to calculate it is essential to ensure the best performance for your business.
Want to understand this topic better? Then follow along!
Understanding your company's profit margin is useful in a variety of scenarios. It's a good indicator of profitability for any product or service, as its results are expressed not in raw numbers, but rather as a percentage.
Even if a sale generates, for example, R$$1000 in profit, that doesn't say much about its profitability. If the initial investment was R$$1000 or less, then the return was high. But if you had to pay R$$1 million and only received R$1,000 in return, your profitability was very low.
Additionally, you can use this information to see if you need to change the price of your products to improve your business's profitability. When determining how much to charge for your services, having an idea of the margin you want to make is always very useful. What's more, based on the profit from your activities, you can establish sales targets and define where you hope to arrive.
Once you understand the value of this indicator, the next step is to figure out how to calculate it correctly. Here's a simple step-by-step guide to doing this calculation!
The entire calculation is based on two main indicators: your income and your expenses. Keep track of these in your daily life, and you'll have the data you need to get started.
Next, you need to determine your profit. Choose a specific period and record the accumulated costs and revenue over that period. Or, if you prefer to analyze the profitability of a specific product, calculate the costs involved in manufacturing and selling it. Then, simply calculate the difference between revenue and costs: the result will be your profit.
Finally, to define the margin, you must use the following formula:
PROFIT MARGIN = (PROFIT/REVENUE) x 100
The final number obtained from this formula will be expressed as a percentage. To make it easier to understand, let's use an example. A product costs R$50 to manufacture and can be sold for R$100. Thus, we have:
Plugging these numbers into the formula, we get the following:
PROFIT MARGIN = (50/100) x 100
PROFIT MARGIN = 0.5 x 100 = 50%
So, in this example, we have a profit margin of 50%, that is, half of your revenue is profit from the sale of this product.
In this case, it means you incurred a loss, not a profit. In other words, you lost a percentage of your investment. This situation is extremely detrimental to your company, as it can seriously impact its financial health.
Don't think it's impossible to have a negative profit margin. The more complex the cost calculation—this happens if there are many factors involved, such as employee payments, water consumption, energy, raw materials, taxes, etc.—the greater the chance of miscalculation. Therefore, it's important to be very careful when calculating costs!
With this information, you're now ready to calculate your business's profit margin more easily. Don't forget to do these calculations, as they provide the basis for good management financial.
Do you have any other questions? Leave a comment. We'll be happy to help!
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