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 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 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.
Get a healthy profit margin
Does your business have a net profit margin lower than 10%? Here’s what you can do to determine where you can increase your profits.
First, create a table that has your gross and net profit along with your net profit margin and fixed costs.
Now that you have a table, take 3 of the products you offer and analyze overall cost and profit. Which products make the most profit?
You can increase profitability by performing two key actions: reducing the cost of your product or increasing the price.
Ways to reduce cost:
- Negotiate with suppliers or find a new one
- Buy things in bulk
- Adjust your operations systems
How can you adjust your marketing systems to sell more of your high-profit margin items?
If you decide to increase your price, show your customers that the value of your products has increased. This helps your customers understand and accept your price increase.
Have the exact data to evaluate your profitability.
Now that you have the data, start to generate a profitable company. Move your profit margin up to a healthy place and create products that are profitable from the start.
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.