Rasmussen MA CEC PCC Everyone wants a profitable business, because if not… well what’s the point? You have a hobby, not a business. A profitable small business has a healthy net profit margin of 10% or higher.
How do you calculate your net profit margin?
A profit is earning more money or assets than you spent. The inflow must be greater than the output. You can say you have a loss, but you earned more customers, still is a loss, not a profit. Customers, “likes” or positive reviews cannot be cashed to pay the bills.
There are two kinds of calculations for profit: net and gross.
Gross profit
Gross profit is the cost to make your product subtracted from the sales of the product.
If you make widgets that cost $5 to produce and you produce 1,000 of them in a month, that would be the cost of your product: $5,000.
If you sold all of them for $10, then you would have $10,000. Gross profit would be $10,000 (sales of the product) – $5,000 (cost of the product) = $5,000 gross profit.
Net profit
Net profit is simply taking the gross product and subtracting the fixed cost of your business.
If it costs $1,500 a month to run your business, you would simply take your gross profit and subtract your fixed cost of running the business. $5,000 (gross profit) – $1,500 (fixed cost of the business) = $3,500 per month.
Net profit margin
Your net profit margin is taking the net profit over the total sales. $3500/$10,000 = 35%.
That’s a great number. A profitable business has an overall net profit margin of 10% or higher.
How to Get a healthy profit margin
Does your business have a net profit margin lower than 10%? It can feel scary to look closely at the numbers, and profit is more complex than simply “raise prices” or “cut costs.”
Often there is something hidden in your finances that you are just not seeing. It could be excess interest, subscriptions you no longer use, underpriced services, or a product that looks busy but quietly loses money every month.
This is where a conversation with someone objective can make a big difference. You do not have to figure this out alone. Reach out to someone who cares about you and will not judge you, such as:
- Your bookkeeper or accountant
- Your business bank manager
- A qualified business coach
- A trusted mentor from your industry
Together, get crystal clear about everything coming in and going out of your business.
If you have the Successful Business Field Guide, use the Profit Calculator on page 180 to do a full audit for a single month. Enter every dollar of income and every expense. That one month will tell the story of what is really going on in your business.
If you do not yet have a Field Guide, you can get a digital copy for $100. It includes most of the tools you need to strengthen your business and follows these weekly tips, covering 52 core business competencies.
You can buy it here:
https://organizedandprofitable.com/product/electronic-field-guide/
Do not wait too long keeping a business open that is draining your resources. Get it set up on the profit side so your hard work pays you back.
Until next time, enjoy your Entrepreneurial Journey!
The Small Business Field Guide
This blog highlights only a few of the skills small business leaders need to run a profitable business. If you want to learn more, grab a copy of the Small Business Field Guide.
This guide covers everything you need to know to have a prosperous business.
