The ideal Profit Margin for your Business

Profit is a simple formula, your income minus expenses. But what is even more important is the profit margin. I see many entrepreneurs make the mistake of considering profit only as a sum and not calculating the profit margin. The profit margin represents the profitability of a business as a percentage. It is the percentage of every dollar invested in sales that a business maintains.

For example, if a business has a 10% profit margin, it has made 10 cents for every dollar it brings in. Another way to think about it, is the percentage of profit left after all costs and other expenses have been deducted. This will give you clarity on where you are and where you should be. To arrive at the percentage or margin, take your profit (total income - total expenses) and divide it by the total income. That is your profit margin.

The margin of each industry is going to be very different, but knowing your industries profit margin will allow you to use it as a benchmark. You will want to get the industry's average. This will give you a direction on where your business should be and work towards getting close or better than the industry.

Ask your banker for the industry standard for growth profit. You can get the profit guidelines by industry from your local SBDC or SBA or get a copy of an annual Statement Study of your industry's ratio at: www.rmahq.org/annual-statement-studies