Why profit margins are key to business success

Kevin D. Bannister, MD of The Accurate Accountant, explains the science behind calculating a profit margin on projects, and why it’s vitally important to the success of your business

As a KBB retailer, your projects play a pivotal role in driving growth. Whether you’re an experienced entrepreneur or just starting out on your retail journey, understanding profit margins is essential but understanding the profit margins of each project is what will take your business to the
next level.

To do this, you first have to understand what the term ‘profit margin’ truly means. Profit margin is the ratio of profit to revenue (sales), expressed as a percentage. It is a vital metric used to evaluate a company’s profitability and efficiency. Obviously, a higher profit margin indicates a more financially sound business.

To make it even more confusing, there are a different types of profit margins, each focusing on different aspects of your business. Here are three of the most common:

Gross profit margin: This margin reflects the percentage of revenue that remains after subtracting the cost of goods sold (COGS). It’s the first step in assessing profitability.

Operating profit margin: This margin considers not only COGS but also operating expenses (rent, admin staff, travel etc), providing a more comprehensive view of profitability.

Net profit margin: This is the most critical margin. It takes into account all expenses, including taxes and interest. This is the ‘bottom line’ of profitability of your business and what can be drawn from the business by the owner.

Why they matter

Project profit margins are a key performance indicator for a project’s viability. A positive margin suggests that the project is financially sound, while a negative margin indicates that it has the potential to be troublesome. Aside from the obvious, there are some really key benefits to tracking the profit margins of your projects:

Effective resource allocation: By understanding the profit margins of individual projects, you can allocate your resources more efficiently, focusing on those that offer the best returns.

Decision-making: Project profit margins play a crucial role in making decisions about doing the same type of project, expansions in the business, and not providing a discount to get a sale that does produce any profit.

Factors such as inefficient resource allocation, scope creep, inaccurate pricing and unexpected risks can significantly impact profit margins.

Identifying and addressing these factors is crucial for success. There are different types of software that can be used to track projects. If you are already using software to track your project status, it is likely you will be able to add costs and revenue to this.

Strategies for boosting profit margins

COST CONTROL: Effective cost control is essential for increasing project profit margins. Regularly review project expenses and look for cost-saving opportunities.

ACCURATE PRICING: Pricing your project accurately is crucial. Ensure that your pricing strategy covers all costs, while allowing for a reasonable profit margin.

SCOPE MANAGEMENT: Scope creep can increase project costs. Maintain a clear project scope and communicate any changes to avoid budget overruns.

RESOURCE ALLOCATION: Allocate resources efficiently to maximise your project’s profitability. Ensure that the right resources are assigned to each project.

RISK MANAGEMENT: Identify potential risks and create contingency plans. Being prepared for unexpected challenges can prevent costly disruptions.

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