If you’re like most small business owners, you're probably constantly looking for ways to cut costs and increase your revenue. But how do you actually determine the profitability of your business? By using the correct profit margin formula, you'll be able to quickly get an accurate look at the state of your company finances. \nWe're defining all of the important terms you'll need to know and breaking down how to find out what your company profit margin is. If you don't have a handle on the numbers you'll need to use these profit margin calculations you may want to seek out an accountant to help. Then we'll compare the profit margins in a variety of industries and give you some great tips on how your business decisions can improve your profit margin percentage and bottom line. \nWhat is a profit margin?\n \n \nBefore we get started, it's important that any small business owners understand what a profit margin is and what it means for their company. Essentially, a profit margin is a tool that you can use to figure out how profitable your business is and how efficiently your resources are being used, in the form of a percentage. The various formulas to determine your profit margins take into account things like revenue, cost of goods, and operating expenses. By plugging these numbers into the correct formula, business owners can understand how their net income relates to their overall revenue. In general, the higher your profit margin is, the more money your company is making. \nProfit margin formula\n \n \nMultiple different formulas can be used to determine the profitability of your company. Before we get into the specific equations and how they relate to your business, let's take a closer look at the basic profit margin formula and what information you need to take from your income statement in order to calculate it. \nProfit margin = (gross margin - expenses) \nGross margin refers to your earnings after the costs of production, including expenses like supplies, equipment, and labour. Expenses refer to the costs your company incurs after production and includes things like rent, employee salaries, and marketing costs. \nWhen you subtract your expenses from your gross margin, you end up with a number that represents how much of the money your company made in revenue is being retained after all of your expenses. \nProfit margin example\n \n \nTo help illustrate how the profit margin equation can be used in practice, let's use a sample business and calculate their profit margin. \nYour real estate construction company has a total revenue of $150,000 yearly. The cost of production-related goods, including building materials and equipment, comes to $50,000, making your gross profit margin $100,000. Your operating expenses, including paying your construction workers and real estate agents, rent, and taxes come to $40,000. Let's plug those numbers into the equation to figure out your profit margin. \nProfit margin = ($100,000 - $40,000) \nProfit margin = $60,000 \nWhat are the different types of profit margin?\n \n \nDepending on what specific information you're looking for, there are a few different formulas for calculating profit margins. We'll explain in depth what each equation is for and how to use them in your business. \nGross profit margin\n \n \nGross profit margin = ((revenue - COGS) / revenue) x 100 \nCost of goods sold (COGS) includes any expenses associated with the production and manufacturing of your product, including all materials and labour. COGS does not include any costs to your business that occur after production. \nThe gross profit margin equation is often used by businesses to determine a single product's profitability instead of the company's overall profitability. \nFor example, let's imagine that you design and sell mugs for $20, and they cost you $5 to make. \nGross profit margin = (($20 - $5) / $20) x 100 \nThis leaves you with a gross profit margin of 75 per cent, meaning you retain 75 per cent of every dollar that you make after subtracting COGS, but not including operating costs after production. \nOperating profit margin\n \n \nOperating profit margin = (operating income / revenue) x 100 \nThis formula considers all operating costs after production, including rent, salaries, and day-to-day company operations, to determine the percentage of each dollar that your business retains after all expenses (excluding any debt repayment, taxes, and non-operational expenses). \nFor example, you run a small business operating outpatient care centers. Your operating income is $60,000, and your revenue is $100,000. \nOperating profit margin = ($60,000 / $100,000) x 100 \nAccording to the operating profit margins formula, you are retaining 60 per cent of your company revenue. \nPre-tax profit margin\n \n \nPre-tax profit margin = (pre-tax income / revenue) x 100 \nThis profit margin measures businesses’ operating efficiency and profitability by showing what percentage of sales are turned into profits before taxes. \nFor example, let's say that your auto detailing shop has a pre-tax income of $75,000 and yearly revenue of $150,000. \nPre-tax profit margin = ($75,000 / $150,000) x 100 \nYour pre-tax profit margin is 50 per cent. \nNet profit margin\n \n \nNet profit margin = ((revenue - total business expenses) / revenue) x 100 \nThe net profit margin formula measures the profitability of your business as a whole. \nFor example, your handmade jewelry business makes $50,000 in revenue, and your expenses are $10,000. \nNet profit margin = (($50,000 - $10,000) / $50,000) x 100 \nThis leaves you with a net profit margin of 80 per cent. \nWhat is a good profit margin for your business?\n \n \nNow that you have a thorough understanding of the different types of calculations you can use to determine your profit margins, it's time to consider what a good profit margin is. What makes a profit margin good has to do with a number of factors, like how successful your business is in its first year and how you deal with the growing expenses that come with business expansion. A good operating profit margin is also highly dependent on the industry you're in, so don't get discouraged if your profit margin is a lot lower than the average profit margins in a different industry. \nAverage profit margins by industry\n \n \nSince the average profit margin for each industry is so varied, using research by the folks at IBISWorld, we've gathered up a shortlist of the most profitable industries in Canada according to their profit margins. \nHealthcare\n \n \nPrimary care doctors: 55.4 per cent average profit margin \nPhysical therapists: 32.5 per cent \nDentists: 32.4 per cent \nReal Estate\n \n \nReal estate investment trusts: 46.5 per cent \nApartment rental industry: 37.4 per cent \nFinancial Services\n \n \nCommercial Banking: 44.7 per cent \nLaw Firms: 43.8 per cent \nGambling: 36.5 per cent \nConsulting\n \n \nHR consulting: 32 per cent \nManagement consulting: 31.7 per cent \nIf your profit margin isn't where you think it should be, there are always ways to make it better. \nWays to improve your company profit margin\n \n \nNo matter how high your profit margin may already be, there is always room for improvement. Here are some ideas that you can implement in your small business if you want to boost your gross profit and see a higher balance on your income statement this year. \nDecrease expenses\n \n \nOne of the best ways to increase your profit margin is by decreasing your operating expenses. That could mean eliminating overtime and adjusting your workflow, or it might involve negotiating with your vendors. Try to increase your order quantity to be higher than your vendors' MOQ (minimum order quantity) in order to get access to better rates and savings. Just make sure that if you're looking for ways to cut costs, you don't compromise on the quality of your offers. \nIncrease perceived value\n \n \nTake a look at other businesses in your industry to see the different levels of value and how they are marketed. You may notice that by presenting your offer as high value and using a marketing language that focuses on how your business improves your customer's lives, you're able to demand a higher price for what you're selling. Start by looking at the pricing of your top-selling products, raising where you can, and if it works you can slowly adjust all of your products to be sold at higher rates. Tiered pricing options can also encourage buyers who purchase low ticket offers to convert into a mid- or high-level sale. Make sure that you are placing your most profitable products in high traffic, high visibility locations, whether your business is online or in person. \nAvoid markdowns\n \n \nWhile offering sales is a great way to move inventory, markdowns ultimately mean that your profit margin is going way down. If you are looking for ways to avoid markdowns, put your efforts into improving inventory visibility and management. \nUpselling\n \n \nIncrease your average order value by upselling and cross-selling relevant add-on products or services. Encourage impulse buys at the checkout by offering special deals and promoting items that your customer might have missed, but your research shows that they are likely to buy along with what's already in their shopping cart. \nNo matter what techniques you choose to explore to increase your operating profit, keep notes on how your promotions perform, and use that knowledge to inform future business decisions.