What’s Affecting your Sales Margins?
Business owners often juggle plenty of responsibilities on their plate, but out of all the comings and goings in your brand’s operations, the sales margin comes up on top as the cornerstone that defines your overall health. Since a business has many layers, your sales margin serves as the key metric determining how much money is actually going to your bottom line.
What is Sales or Profit Margin?
In essence, a profit margin describes the measure of your company’s earnings relative to its revenue. This umbrella term also includes three primary margin ratios that affect your sales margin:
- Gross Profit Margin = Gross Profit / Revenue x 100
- Operating Profit Margin = Operating Profit / Revenue x 100
- Net Profit Margin = Net Income / Revenue x 100
While the ideal sales margin varies for every industry, generally, it’s good to reach at least a ten per cent net profit margin on average. Sales margin also uncovers problems in how your business spends money, so tracking your margins should reveal areas of nonessential operating and overhead costs that still need cutting.
What are the Factors that Affect Your Sales Margin?
When it comes to pinpointing the factors that influence your profit margins, it essentially encompasses all aspects of your operations - from branding, marketing efforts, management, and everything in between. Ultimately, you can categorise the factors in the following ways:
Quantitative Factors
Quantitative factors describe the easiest, identifiable broad numbers, such as your net profits, sales earnings, and merchandise costs. These generally describe expenditures that run the gamut of your business, though keep in mind that you also need to consider your taxation since it impacts your net income.
Additionally, this factor also encompasses anything that can be measured in numerical form for financial and non-financial terms, from the cost of materials, manufacturing labour, marketing spendings, and more.
Qualitative Factors
Qualitative factors are often harder to measure since it often involves outcomes that cannot be measured in numerical terms such as the effectiveness of your advertising, seasonal changes, employee morale, consumer preferences, company leadership, sales reward programs, competitiveness, and more.
These are all elements that directly impact the company’s decision-making process, which is why it will also have a landslide effect on your future expenses and earnings.
The Bottom Line: Knowing the Factors that Impact Your Company’s Sales Margins
Uncovering your company’s profit margins doesn’t require complex formulations or technical ratios, but despite its simplicity, it serves as one of the most fundamental indicators of the sustainability and success of your business.
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