Sometimes your cash flow is good.
Sometimes it’s great (and sometimes it’s really, really not)...
When lots of money is coming in, it’s easy to think you’re in good financial health.
But then wages come out. Then it’s tax time. Then you’ve got 5 big supplier invoices to pay…
All of a sudden, you’re feeling like you’re back at Square 1.
So how do you tell if you’re actually making progress in your business?
Two words: Profit margin
Your profit margins are like the BP measure of your business.
They will tell you quickly and easily if you’re using your resources optimally.
Gross profit margins…
Net profit ratio…
They’re all a measure of your true business health.
Your gross profit margin show whether the average markup on your product or service is enough to cover your expenses and still leave enough for profit.
Whereas your net profit shows you how much you’re making after all of your direct expenses.
Without mastering the dynamics behind your profit margins, I can guarantee you won’t be making the kind of money you should be making.
You might even get yourself into debt, and/or even have to eventually close your business.
So where do your margins sit right now?
While a high profit margin indicates you’re running effectively, a low profit margin can mean several things, including:
- High competition in the marketplace
- Inefficiencies in how the business is run
- Missed opportunities for more back-end profit
Knowing your profit margin offers heaps of benefits:
It removes the guesswork when you’re setting your prices.
It allows you to correctly cover the cost of their product or service production, costs, and expenses.
It gives you the financial freedom to invest back in the business where needed, because you know your running costs are covered.
Lastly, it allows you to scale your business, or even open more businesses if that’s what you want.
Because once you’ve mastered profitability once, you know how to apply it to different businesses and test different scenarios for success.
A lot of business owners think that increasing profits just means raising prices.
While this is one way to do it, there are a number of ways to increase profitability.
It’s part of what we teach at The Game Changers to members of our Opulence program.