Question # 15: What is "margin" and why should I care?
1. You’ll be able to pinpoint areas where your business is struggling
By running the three margin calculations, you’ll be able to get a much better idea of where your business is thriving and where it may be struggling.
For example, if your gross margin ratio for one product is 50%, but only 21% on a second product, you may want to spend some time determining why one product is performing so much better than another. The same principle applies to net profit margin. If your net profit margin is too low, that can be a sign that you need to reduce expenses.
2. You’ll be able to set better pricing levels
It’s not always easy to set pricing levels. Sometimes, your price may be too high, resulting in slower sales. Other times, if you set your prices too low, you’ll end up losing money. Knowing your margins can help you when calculating markup, which in turn allows you to set more accurate pricing that will keep your business competitive.
3. You’ll know the overall health of your business
Margins can tell you and your investors a lot, such as whether your cost of goods sold is too high for your revenue totals, whether your operating expenses are eating into your profits, or whether business operations are successful overall. It can also be beneficial to compare your profit margins to similar businesses to see if you’re on target or struggling to remain profitable.