Thinking about profit margin

In all businesses it is fairly easy to calculate the hypothetical profit margin that you could make – but the important thing is to work out the actual profit margin that you do make.

In a shop, work out the average daily running costs and then take this away from takings and you have a basic measure of profit. Where it gets interesting is when you try to work out which parts of your business are delivering the profits. For many businesses, putting in place the processes to break down and measure profitability is a big task.

Starting from scratch, you have to think hard about where costs should be allocated. You then have to work out what the actual sales figures really are. In retailing, many retailers make the mistake of focusing on mark-up and forgetting rate of sale. If you have a product with a 100% mark up that sells once a week, you may find that a product with a 20% mark up that sells 100 times a day is the real profit generator. The process of finding out is also good for your wealth.