One area of business that gets looked over anymore is the basic understanding of profit/profit margin. This one area can destroy you whether running a business or if you’re talking about business. I’ve heard many business owners complain to me how people who don’t run business have no basic grasp of this concept. Store manager told me a frightening story of when the local highschool business class came to visit the store he managed. One student thought that when items were sold for $5, the store kept all the money. He told me with a distraught look, “These were Seniors”.
So lets breakdown this concept for better understanding. I’ll use some examples from the small business section of the Houston Chronicle:
For example, let’s say a furniture store sells $500,000 worth of furniture a year and its total expenses to operate the store (rent, utilities, labor, advertising, licenses, merchandise etc.) total $400,000. Take the $500,000 in revenue and subtract the $400,000 in expenses, and that furniture store has an annual profit, also called net income, of $100,000.
Profit margin acts as a measurement of a company’s profitability. It measures how much a company keeps in earnings from every dollar of sales it generates. Unlike profit, which gets measured in dollars and cents, profit margin gets measured as a percentage. To measure profit margin, use the company’s net income divided by the total sales generated. For example, the furniture store had a net income of $100,000 and generated $500,000 in sales. To determine the store’s profit margin, divide the net income ($100,000) by the total sales revenue ($500,000) and the store has a 20% profit margin—$100,000/$500,000 = 0.20 or 20%.