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How to Measure and Improve Your Profit Margins
2017-03-21 | by Gene B. Reynolds, CPA
Every business, regardless of size or industry, can benefit from understanding and accurately measuring their profit margins.
These margins provide a benchmark of a company’s overall health and profitability which enable them to make smarter business decisions.
Our Houston CPA firm can help your business review and improve its margins on a case-by-case basis and have assembled the following definitions and formulas as step one.
Gross Profit Margin
Your gross profit margin measures how your production costs relate to your revenues without factoring in overhead.
How do you calculate it?
Revenue – Cost of Goods Sold (COGS)
Gross Profit Margin = —————————————————
Revenue
COGS or above-the-line charges should only include the direct cost of production such as labor and materials. It does not include overhead!
Why does this number matter?
If you have a gross profit margin lower than industry standards, it could be an indicator that your business is not operating at its maximum efficiency or profitability potential.
Where does our Houston CPA Firm fit in?
Reynolds and Associates will review the items you’ve deemed above-the-line to help you determine if a low margin is a result of too many production expenses or not charging enough for the goods or services provided.
We cannot make business decisions for you but do promote business best practices and use our knowledge and experience to guide you in the right direction.
Operating Profit Margin
Your operating profit margin is similar to your gross profit margin but includes all operating costs except interest on debt and taxes.
How do you calculate it?
Operating Income
Operating Profit Margin = —————————————————
Net Sales
Why does this number matter?
Your operating profit margin highlights your ability to turn revenue into profit.
The higher your operating profit margin, the more protected your business is from a potential downturn and the more likely you are to attract investors.
Where does our Houston CPA Firm fit in?
Any reliable accountant should be able to help you calculate your margins, but not every accountant will help you uncover problem areas and advise on best practices to follow.
There’s often a different way of channeling your day-to-day operations that will benefit your profit margins, and our team has the experience to find it.
Contact Reynolds and Associates Today!
About the Author
Gene B. Reynolds, CPA
Gene is the Founder and President of Reynolds and Associates, a Houston-based CPA Firm. He has spent 42 years helping Houston entrepreneurs navigate their enterprises through both calm and stormy waters.