Profit margin ratios are basically a measure of efficiency for your business. It takes your revenue and calculates actual profit after subtracting your expenses. This is vital information for business owners as it is a good indicator of the financial health of your business. If you find that your profit margin ratio is not in favorable standing and your business credit card is maxed out, you should look into some of the ways you can improve it. Here are five ways to improve your profit margin ratio.
Net Profit Margin Ratio Formula
First, you have to calculate net profit margin ratio before you learn how to improve it. The net profit margin ratio calculation includes two elements, net income, or gross income, and net sales. It is very simple. All you have to do to calculate net profit margin ratio for business is to divide your net income by your net sales. The solution to this equation will leave you with your net profit margin ratio. If the number does not look good, keep reading to learn how to improve it.
Raise Your Prices
A lot of business owners may not be so keen on this option because it may lead to a loss of customers. However, it is a risk that will likely help you in the long-run, just look at the Starbucks franchise. The increased prices will offset the losses you take from losing customers. The customers that leave immediately will also free up more of your resources, as they were likely the least profitable customers anyway. Look into your competition, and find ways to improve your product so that the increase in prices is not just seen as an inconvenience. You will eventually return to your previous rate of sales while increasing revenue, greatly improving your profit margin ratio.
You will not see optimal improvement in your profit margin ratio if you only focus on increasing revenues. Ideally, you will want to decrease the cost of goods simultaneously. Shop around for new manufacturers that can offer you the same goods for a better price. Think about how much quantity you need, and leverage the prices by buying in bulk. Sticking to a supplier that charges too much is unnecessary and detrimental. Find one that will align better with your finances, and you will see an immediate increase in your profit margin ratio.
Prevent Inventory Waste
Moreover, cutting on your cost of goods means nothing if you are not managing your inventory correctly. Oftentimes, businesses suffer losses due to spoilage or theft. These types of losses are easily avoidable if you take care in keeping track of your inventory. Also, ensure that you are buying only as much as you need. Having an excess of supplies will only result in most of it going to waste. Manage your inventory well and you will find that it will benefit your profit margin ratio rather positively.
Analyze Product Profit Margins
Take a close look at your profit margins. Are certain products bringing in more profit than others? If so, you should consider focusing on more profitable products while dropping the ones that are negatively affecting your profit margin ratios. The numbers will tell you everything. If the revenue from certain products is not justifying the costs of manufacturing them, it might benefit you to step away from them entirely. Reduced manufacturing costs and a freeing of resources will only help to boost your profit margin ratio.
Don’t Give Discounts
Discounting is a tempting practice as it can help bring in new customers and increase revenue. It is also incredibly dangerous and often not worth the risk after incorporation. If you gave a discount of 10%, you would have to increase sales by over 20% just to break even. Failing to meet that expectation will result in heavy losses. Do not give in to lowering your product’s value to make it more appealing. Focus instead on giving reasons for why it is worth more. Improved profit margin ratios will surely follow.
Your profit margin ratio is the pulse of your business. By analyzing it, you can find ways to increase profits while reducing on your expenses. If you are concerned by your business’s margins, you can utilize the strategies laid out in this post and ensure that your profit margin ratio increases immediately.
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