In today’s business world, everything is both fast-paced and high-pressure; and understanding some financial metrics isn’t just for accountants to understand, these financial metrics are also essential and necessary knowledge for every single entrepreneur, decision-maker, corporate employee and business owner. There are many financial metrics to know about, but in this blog post, we are going to talk about three of those critical concepts. Those are: Margin, Profit, and Breakeven. They are interconnected, and each metric serves a specific purpose in assessing your company’s financial health and planning for sustainable growth.
Margin: Measuring Efficiency
Margin provides a different perspective which is efficiency rather than the perspective you can get from profit. Margins can show what percentage(s) of your company revenue is actually profitable. It gives you a better understanding and clearer picture of how effectively your company operates.
There are two common margins that are used:
- Gross Margin: This shows how efficiently you are producing and delivering your services or products. To calculate your Gross Margin is your Gross Profit/Revenue x 100.
- Net Margin: This reflects how profitable your entire company is after all expenses, liabilities, and payables are accounted for. To calculate your Net Margin is your Net Profit/Revenue x 100.
Monitoring your margins can help you optimize your pricing, identify inefficiencies and help you make smarter and futuristic financial decisions.
Profit: The End Goal
Your Profit is the ultimate tangible reward for your dedication and investment (physically and mentally) in a company. It is the financial amount that is left after the expenses, rent, salaries, taxes, production costs, liabilities and more are deducted from the total revenue. This formula is expenses-revenue=profit.
There are 2 types of profit to know about:
- Gross Profit: This is the revenue subtracted by the cost of goods sold (also known as COGS). The gross profit mainly focuses on the costs that are directly related or tied to creating/manufacturing your services or products.
- Net Profit: This is the money that is left after all other expenses in the operations, taxes, and interest aspects from the gross profit. This is a true reflection of your company’s profitability.
Profit isn’t just a number, its an indicator of your company’s success and growth. When your profit is positive, it signals that your business is thriving. When its negative, this means adjustments are needed to regain positive growth.
Breakeven: Understanding When You Are In The Clear
Breakeven is the financial tipping point where your revenue = the total expenses, either profit or loss. To ensure long-term survival, for startups and small businesses to have this milestone.
To understand and calculate your breakeven point, you can use the formula:
Fixed Costs/(Price Per Unit – Variable Costs Per Unit)
When you calculate and understand the breakeven point of your business; you are able to answer these questions that will most likely come up.
- How much do I need to sell, minimum to cover my expenses and costs?
- Are my current prices and manufacturing levels sustainable or do I need to adapt/change anything?
- What changes am I able to make to reach my target profitability faster?
The Key Differences
While your profit shoes how much money you make, your margins can reveal efficiency. Breakeven shows the smallest level of performance needed to avoid negative financial reports and losses. But together, these three margins can form a roadmap for knowing and understanding your business’s financial health.
But Why Does It Matter?
With understanding these metrics you can make informed financial decisions about investments, costs and prices; set sale goals and growth target goals that are both realistic; and plan for profitability/avoid financial downfalls.
They aren’t just numbers, they are languages of business/financial success. So whether you’re a successful business professional or an aspiring entrepreneur; you can know and understand these fundamental metrics to empower you and drive your business to positive, sustainable financial growth.
For more blogs like this one; click right here for more!Links to an external site.