Wed 16 Apr 2008
How to Calculate Your Profit Margin for Maximum Impact
For your small business to succeed, it is essential not only to have good sales, but also decent profit margins. Your profit margin not only contributes to the present, but will also to help you fill your nest for the future.
Given below are some ways to calculate your profit margins to ensure a healthy future for your business.
Check Out Your Competition
You should know the rates that your competition is selling their products, especially if they are in the same market as you. You will then get a base for your pricing.
Your base price should be above your purchasing costs and over other expenses associated with purchasing, like storing and shipping products to your customers.
Know Your Direct and Indirect Expenses
You will have many other costs associated with your purchasing costs. These may be direct expenses such as taxes and freight. They may also be indirect expenses such as advertising, rent and staff salaries.
Indirect expenses are usually fixed expenses - and some expenses, such as staff salaries, will increase every year. You will need to calculate the percentage that these costs constitute over your basic product costs and add them to your basic costs.
You can now calculate your profit margin from this figure.
Be Flexible In Calculating Profit Margins
If you are offering services in addition to products, then these will also add on to your profit margin. Sometimes, in order to get an order, you might have to lower your product profit margin and recover it from earnings from your services.
At the end of the day or year, it is the average profit that you have earned over the entire range of your products and services that will determine whether you have made or lost money in your business.
Calculate your profit margins after factoring in all your direct and indirect expenses - and ensure that you not only earn money now, but also manage to save for the future.