How to Calculate the Profitability of Your Small Business
As a small business owner in the UK, you understand how important it is to keep your costs low and your profits high. Knowing how profitable your business is can help you make informed decisions about expanding, cutting costs, and more. But how do you determine profitability?
Here’s an overview of what you need to know.
Methods to Determine Profitability
Gross Profit Margin
Gross profit margin is one way to determine profitability for your small business. This number tells you what percentage of sales are left after accounting for the cost of goods sold (COGS). To calculate gross profit margin, divide gross profit by total revenue and then multiply by 100%. For example, if your total revenue is £100,000 and COGS is £70,000, then your gross profit margin would be 30%.
Operating Profit Margin
Another key profitability metric for small businesses is operating profit margin. This is another way to determine profitability. This measures what percentage of sales are left after deducting all operating expenses—like marketing, administration costs, salaries and wages. To calculate operating profit margin, divide operating income by total revenue and then multiply by 100%. For example, if your total revenue is £100,000 and operating income is £35,000 then your operating profit margin would be 35%.
Net Profit Margin
Lastly, net profit margin measures overall profitability after taking into account taxes as well as all other expenses associated with running the business. To calculate net profit margin divide net income by total revenue and multiply by 100%. For instance if your total revenue was £100k and net income (also called net profit) was £30k then your net profit margin would be 30%. This is a third way to determine profitability.
Determine profitability for a small business requires understanding several metrics such as gross profit margin, operating profit margin and net profit margin. Each metric allows us to gain a better insight into our company’s efficiency when it comes to generating revenues from operations. By monitoring these metrics regularly we can identify areas that need improvement or strategies that are working well so that we can maximise our profits in the future. Properly managing these metrics will ensure that our small business remains successful in its operations while sustaining steady growth over time.