What is a good profit margin?
Increasing your companys net profit margin should be one of your main goals as a business owner. But when its time to start analyzing your profit margin, its essential to have a strong understanding of the average profit margin by industry. Otherwise, you wont be able to accurately assess your companys performance. Find out more about the meaning of a good net profit margin with our comprehensive guide. Your businesss profit margin must be as high as possible. The higher the margin, the healthier your profits, and the more confidence investors will have in how your business is being managed. Furthermore, having a good net profit margin can help you achieve financing  an important element of growth  more quickly. Knowing your companys profit margin can also help you to identify and resolve issues, providing you with an opportunity to take advantage of efficiencies to save time and money. How to calculate your companys profit margin  There are two main types of profit margin: gross profit margin and net profit margin. Gross profit margin is the income that your business has left over after accounting for direct expenses, such as manufacturing costs and direct labor. Net profit margin is the income that your business has after all costs have been paid, including interest and taxes. For the most accurate insight into your companys financial health, youll need to look at the net profit margin. Heres the formula:  Net Profit Margin = ((Operating Profit  Interest  Tax) / Revenue) x 100  Average profit margin by industry  To a large extent, the meaning of a good net profit margin is dependent on your industry. According to a report from CBS, the following industries have the highest average net profit margins:  Accounting, tax preparation, bookkeeping, and payroll services (18.3%)  Legal services (17.4%)  Lessors of real estate (17.4%)  Outpatient care centers (15.9%)  Offices of real estate agents and brokers (14.8%)  If you look at these average profit margins by industry, you can see that theyre all service industries with minimal overheads. By contrast, car dealerships, construction, and oil/gas extraction are widely reported to have low profit margins, mainly because of the significant overheads that businesses in these industries need to deal with. Ultimately, a good net profit margin isnt just about how much money youre making, but how your margins compare with other businesses in your industry. If youre outperforming the industry benchmarks, you should consider your business to have a good profit margin ratio. Good profit margin ratio: new businesses vs. mature businesses  Its also important to remember that a good profit margin ratio is likely to mean different things for companies at different growth stages. Although its often assumed that new businesses and start-ups have to deal with lower profit margins, that may not be strictly true. In many cases, profit margins decrease as sales increase. This is because the increase in sales will accompany an increase in overheads, payroll, and other expenses. The fact that mature businesses may have more significant cash flows doesnt necessarily mean that their profit margins are larger. How to improve your companys profit margin  If your profit margin isnt where it needs to be, there are several actions you can take. Firstly, try to decrease expenses by cutting the cost of your operations and slashing overheads. Automation can help you to eliminate inefficiencies and optimize your workforce. You should also think about reinvigorating your pricing strategy  for example, by using product bundling  or running an audit to determine which of your products/services arent performing as they should. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.