In this article we will be looking at some basics around margins, helping you to understand your financials better.
Let's start with a fictional company, they have the following information in their accounts:
Sales - R150,000
Cost of sales - R80,000
Gross profit - R70,000
Profit before tax - R20,000
Tax - R3,800
Profit after tax - R16,200
This is the percentage you are making on your sales and is calculated as gross profit / sales x 100%, so for the above it is R70,000 / R150,000 x 100% = 46.7%.
This is the amount added to the cost to get to your selling price and is usually given as a percentage and is calculated as gross profit / cost of sales x 100% = R70,000 / R80,000 x 100% = 87.5%
For some, this is profit before tax / sales x 100% and others calculate it as profit after tax / sales x 100%. I tend to use the before tax figure as most small businesses want to see how this is doing and the tax is just a fact of life! So for the above, profit before tax / sales x 100% = 13.3%
SO, WHAT WOULD BE 'GOOD' MARGINS?
Now this is the million dollar question!! The answer is "it depends" ..
it depends on your industry
it depends on your business model
it depends on your business structure
The key is making sure that the number at the bottom is (a) positive and (b) that you are earning what you want and need from the business as a starting point to support you and then (if it is what you want) that these figures will support growth within the business so that you can then pay others too!
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