Understanding the profit margin for your business can allow you to make reasonable plans and set reasonable expectations on what to expect from you and your business. Many small business owners I talk to are not really clear on the profit margin they are shooting for and therefore take a “Whatever I make minus whatever I spend” approach. Uh, no.
First, let’s start with whether we are speaking about Gross Profit Margin or Net Profit Margin. There is a HUGE difference and a purpose for both measurements. In the end, as far as I’m concerned, only the Net Profit Margin matters to me because that’s what shows up as available for owner distributions, shareholder dividends, reinvestment, charity, etc.
Basics of a Profit & Loss Sheet
Knowing what your target is helps you to create your plan. If you are shooting for a 40% Net Profit Margin in your pizza business, you may well be setting expectations that will be unobtainable. However, if you are a financial consultant and targeting 10%, you may well be undervaluing your time and expertise.
As I searched around for “average profit margins for small businesses” I found this interesting page that goes over much of what we are talking about and has a table of “average.” Now, I’m not lobbying you to be average. But it’s a good thing to know, a place to start.
Things to Know
Here are a list of things to get clear as you begin.
- Based on your industry, what is the “average” net profit margin?
- Do you know your profit YTD, last year and in previous years?
- Do you chart your profit?
- Are you paying yourself a “competitive wage” and still have profit? Or are you considering that anything left over is your profit? (If the latter, you may really just “own” your job.
After you get clear about where you are going it is easier to get there. We’ll have more on this subject next week.
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