Your profit margin is the percentage of revenue that is left after expenses. It varies greatly by industry; and you should know how yours compares to the average in your industry.
There are two types. The gross profit margin is the percentage of revenue left after deducting COGS (Cost of Goods Sold) or Cost of Sales. So, if I buy a book for $5 and sell it for $20 then my gross profit margin is 75%.
The net profit margin is the percentage of profit left after deducting all expenses. Let’s consider my book. After overhead expenses, my bottom line (profit) for that book is $10; my net profit margin is 50%. Usually, I pay a lot of attention to this one.
The actual percentage doesn’t matter; it’s how you compare that matters. For instance, construction has a low margin: 5% and lower; so don’t expect to get more than that on a regular basis. Tax consulting has a higher margin: 20%; so if yours drops to 10% find out why.
Overhead can have a huge effect. Restaurants average a 67% gross margin and a 15% net margin. Can you see where their money goes? Consulting industries tend to be higher because the overhead is lower. Consider a home-based housecleaning business where the only expense is travel to and from the job.
We should check our margins on a regular basis, at least quarterly. If it varies too much from the industry average find out why. There are good reasons to allow your margins to drop. The idea is to know why and decide if it’s reasonable. And if it’s not reasonable then make a change.
Have fun! And be nice to your bookkeeper.