Want to make more profits? Not even sure if you are making a profit? Calculating your gross profit margin should be the first thing you do. Your gross profit margin is what’s left after you factor in what it costs to sell your services. The money that you take from that goes towards paying yourself and your employees.
Your money’s in the margins. If you don’t know what those margins are, you can’t properly plan on how to run your business with the most efficiency and profitability. (Find out how to get more efficient here). To get the gross profit margin rather than just the gross profit, you’ll want to follow this formula:
Revenue – Cost of Services Sold / Revenue x 100
Once you calculate that percentage, you’ll have the necessary insight into how your business is doing and how you can do better. (Here’s how else you can grow your business.) It will reveal the answers to these questions: Are you producing a profit?, What services are you profiting most from?, and What services are you not profiting from?
Are you making a profit?
Delivery costs can make or break your profitability so it’s important that you take them into account when you’re determining how much money you are actually taking home at the end of the day.
Your expenses fall into two different line items: Cost of Services Sold and Operating Expenses. An example of the difference between the two is that the amount of time you spend specifically on client deliverables is your Cost of Services Sold whereas the amount of time spent on every other task like filing paperwork and marketing your services is part of your Operating Expenses.
The gross profit margin only takes into account your Cost of Services Sold and not your operating expenses. That way, we can focus on the variable costs that are relevant when you make a sale and not the fixed costs that you incur regardless of whether you make a sale.
If that gross profit margin is in the negative, you aren’t making a profit. That means that your production costs outweigh your revenue.
What services are you profiting from?
You can calculate your gross profit margin from your services overall to determine the general profitability of your services but you can also calculate the margin on each service to find out how each service is performing.
For instance, if you calculate your margin from providing a brand audit and your margin from creating a social media campaign, brand audits yield a higher profit margin. That is your more profitable service that you’ll want to continue to offer and work to improve. (You might want to change your pricing too. Discover how here.)
Maybe you have a negative profit margin overall but one of your services has a larger gross profit margin than the other services you offer. That service will likely be the key to making more of a profit. You don’t have to worry about whether you’re spending time on the right things because the numbers tell you that you are!
What services are you not profiting from?
A service with a small profit margin is probably not even worth offering. The more time you spend delivering that service, only to hardly profit from it, the more business time you’re wasting.
Your gross profit margin isn’t just another number on your financials, it’s a percentage that informs you about the financial health of your business. It also tells you how to get your profits to grow. If you’re wondering how to get to your next financial goal (Read about financial goal setting here), follow the numbers and you’ll be headed in the right direction.
