Understanding Margins

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

GROSS MARGIN

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%.

MARK UP

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%

NET MARGIN

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!

AND FINALLY...

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