What is profit margin? Business operations always aim at the ultimate goal of profit. The concepts of profit are confusing and complex. However, to understand the picture of money and profit in the business, we have a definition of Profit margin.
So what is Profit margin, let’s follow the article to find out.
Table of Contents
What is profit margin
Before learning about Profit margin is what. We need to understand about revenue and profit in advance because many people confuse these two concepts.
Revenue is an indicator showing the strength of an enterprise such as the spread, domination of market share and the scale of development of an enterprise in the market. The bigger the revenue, the more powerful the business.
Profits are net assets after a quarter or year that a business returns to itself for re-investment and expansion. In other words, profit is part of revenue.
So what is Profit margin? That is the level of difference between the revenue and the profit earned. Holding this index in hand, you will see the growth of a business.
How to calculate profit margin
The calculation of this index is also very simple, just divide the profit by dividing the revenue of the business in the same year. To make it easier to understand, follow the example below.
An enterprise with 2 consecutive years of revenue and profit:
- In 2018: Turnover is 500.000 PHP, profit is 100.000 PHP.
- In 2019: Revenue is 1 billion PHP, profit is 150.000 PHP.
If you look at it, you will see that both revenue and profit will increase in 2019. But if you calculate the profit margin, there is a decrease. In 2018, 10 PHP of profit earned 2 PHP of profit. Meanwhile, this number is only 1.5 in 2019. This shows the risks when investing in this business. Maybe the business is in debt or having financial problems.
Profit margin specific information
Net profit margin
Net profit margin in English is Net profit margin which is used to calculate the ability to generate cash flow for the entire business. The higher this index, the more net profit a business will make. If this indicator does not meet the desired target, the business may be having problems with the cost of personnel, machinery or management.
Net profit margin growth is the top target of young businesses, so it is necessary to control factors such as costs incurred, wages for workers … However, at some point, profit margin Net profits will be saturated, so businesses need to promote growth in the early stage.
Gross profit margin
With the same calculation as net profit margin. However, gross profit margin or Gross profit margin is only applied to a fixed product or commodity.
The gross profit margin is generated to help businesses accurately assess the cost to produce for that product as well as the profit that that item brings. From there it is possible to map out data to negotiate with production service providers. In addition, boosting gross profit margin also contributes to net profit margin.
Summary
The above article has provided you with information about what Profit margin is. In addition, we also give side information such as effects or how to increase profit margins. Hopefully after this article, you can apply the knowledge that you have read above.
See also: What is IRR? The Fundamental Role of IRR in business investment
