03 Jul Profit margin: why should you establish it for your SME?
All SMEs need to establish a profit margin for their products or services. This helps to know if you are getting profits from what you offer or if your SME is really working.
Let’s remember a little what this margin is and what it is for:
The profit margin is the calculation that is made to know the profitability of a product / service or your business as such. It is commonly expressed as a percentage, that the higher it is, the higher you get.
There are two types:
Profit margin gross
This type of margin works for the products or services you offer. This way you can calculate the profit that you have from the sale taking into account the production costs.
For example: you sell handbags with designs printed for $ 600, but everything that involved having the bag already finished cost you $ 400 (paint, labor, fabric, accessories). The profit is calculated from the difference of your sale price and the cost of production.
Sale price (Pv): $ 600 Production cost (Cp): $ 400
Formula to follow:
600 – 400 = 200 You are earning $ 200 for the sale of each bag
But remember that you have to express in percentage:
200/600 * 100 = 33.33% Your gross profit margin is 33.33%
Net profit margin
This type of margin is used to know the profitability of your entire business. Here not only do they involve production costs but costs of all the areas necessary for your business to work.
Costs of administrative, legal, advertising and marketing and even services such as electricity, water and internet.
Normally it is calculated with information of a certain period of time:
Gross sales (Vb): $ 120,000 Total expenses (Gt): $ 60,000
Formula to follow:
120,000 – 60,000 = 60,000 Your net profit is $ 60,000
It is also expressed in percentage:
60,000 / 120,000 * 100 = 50% Your net profit margin is 50%
The benefit of knowing your profit margins will be greater if you accompany it with a general monitoring of the finances of your SME. This way you will know which processes you should speed up or which expenses you can reduce.
For this you can rely on our digital tool, called Kompás, which allows you to know the income and expenses of your SME in real time and you can even see who your best customers are and in what concept.
Remember that by implementing improvements in your business you can achieve the goals you have set.