WHAT ARE PROFIT MARGINS?

The profit margin is a ratio of a company's profit (sales minus all expenses) divided by its revenue. The profit margin ratio compares profit to sales and tells you how well the company is handling its finances overall. It's always expressed as a percentage.

Businesses and individuals across the globe perform for-profit economic activities with an aim to generate profits. Several different quantitative measures are used to compute the gains (or losses) a business generates, which makes it easier to assess the performance of a business over different time periods. These measures are called profit margin.

Businesses are required to report it in accordance with the standard reporting timeframes (like quarterly or annually). Businesses that may be running on loaned money may be required to compute and report it to the lender (like a bank) on a monthly basis as a part of standard procedures.

There are four levels of profit or profit margins: gross profit, operating profit, pre-tax profit, and net profit. These are reflected on a company's income statement in the following sequence: A company takes in sales revenue, then pays direct costs of the product of service. What’s left is gross margin. 

WHAT CAUSES PROFIT MARGINS TO DECLINE?

• One of the simplest factors that can lead to declining margin is higher costs of goods sold. Over time, your suppliers naturally want to increase their own revenue and margins. Their own costs to produce or supply may go up. These factors may lead to them negotiating or simply charging you higher rates on goods.
• A low net profit margin means that a company uses an ineffective cost structure and/or poor pricing strategies. Therefore, a low ratio can result from Inefficient management and high costs of expenses.

HOW TO BOOST PROFITS AND INCREASE YOUR PROFIT MARGINS IN BUSINESS

Examples of tactical strategies to improve margins.

• Avoid markdowns by improving inventory visibility.
• Elevate your brand and increase the perceived value of your merchandise or service.
• Streamline your operations and reduce operating expenses.
• Increase your prices for your product or services.
• Identify and eliminate waste.

Understanding how to increase profits and elevate the profit margin of your business is vital to your bottom line and ability to attract investment. Since a company’s profit margin indicates its ability to manage its expenses, investors use them as a basis of comparison when sizing up a potential investment.