We know that finances can be tricky and hard to develop confidence when it comes to accounting, but knowing the profitability of your small business is key to its success. Learn what the different types of profit margins are, how to identify problems, and how to increase your business’ profits.

We know that finances can be tricky and hard to develop confidence when it comes to accounting, but knowing the profitability of your small business is key to its success. Learn what the different types of profit margins are, how to identify problems, and how to increase your business’ profits.

 

What is a Profit Margin?

There are two kinds of profit margins. Gross profit measures the profitability of a single product line or service. This is calculated by subtracting the costs associated with that product from the selling price. When calculating your gross profit margins, take into account the costs of product development, manufacturing, transportation, packaging, and preparation.

Net profit measures the profitability of your business. This is calculated by subtracting your business expenses from your total revenue. Business costs include rent, utilities, taxes, employee benefits and wages, insurance, cost of goods sold, capital expenses such as equipment depreciation, and much more. Work closely with your accountant to accurately calculate your small business’ net profit margin.

There is no “ideal profit margin” because each industry differs in profitability. For example, one of the highest industries in 2017 was accounting and other professional finance services, with net profits averaging around 18.4%. Compare that with grocery stores and automobile dealerships, two of the lowest profitable industries in 2016, which average at around 2%.

Identifying the Problems

If you don’t keep a close eye on your profit margins and regularly recalculate them, you could run into trouble with your working capital. Doing a cash flow analysis is equally important, so that you don’t get taken advantage of and you know exactly how much money should be in the bank.

When you notice that you aren’t making enough money to grow or are losing money each month, it’s time to take a long look at why your profit margins are low and what you can do to increase them.

How to Increase Your Small Business Profit Margins

Once you’ve done your calculations, you notice some of your products have a low gross profit margin and your business’ net profit margin could be a little higher. What do you do now?

First, take a look at your costs. See if there is anywhere you can cut back, or if you can increase the price. Sometimes lower sales due to higher prices can equalize with a higher gross profit.

Second, make the tough call about cutting unprofitable products or services. If there’s no way you can increase your profit margin and the overall cost of production, selling, overhead, and after-sale customer service is hurting your business, it may be time to discontinue something. However, some key products or services might be worth the sacrifice when it is core to your customers’ satisfaction. Your restaurant might make the most profit off of alcoholic beverages and charging $1.00 for a dollop of BBQ sauce, but that doesn’t mean you should get rid of the free bread. Trust your intuition and business sense. You’re an entrepreneur and know your small business better than anyone.

Finally, see if there are any long-term costs you can reduce by upgrading your old equipment, purchasing a more fuel-efficient vehicle, or paying off your high-interest, predatory merchant cash advance. Need to refinance your unaffordable loan or get additional working capital to help your business in the long term? Talk to us about getting an affordable, trustworthy loan today.

 

For information about Opportunity Fund’s small business loans, please contact us at 866-299-8173 or loans@opportunityfund.org.  For questions about your existing loan or other customer service questions, please contact us at 866-299-8173 or sbhelp@opportunityfund.org.

Loans are subject to credit review. Additional documentation may be required for credit approval. We are an Equal Opportunity Lender. Loans will be made or arranged pursuant to California Department of Corporations Finance Lenders License #6050609.


Opportunity Fund is tackling economic inequality so that hard work and perseverance means a shot at getting ahead, not just struggling to get by. Our programs are supported by a community of donors and investors whose contributions help to fund small businesses, support college students, and build stronger families and vibrant neighborhoods. Since 1994, the team has deployed $700 million and helped thousands of families earn, save and invest in their own futures. Opportunity Fund has earned a 4-star rating from Charity Navigator, America’s largest independent charity evaluator, for our commitment to accountability and transparency.

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