THIS IS THE SIMPLEST BUT MOST POWERFUL PROFIT MAKING FORMULAS THAT EVERY BUSINESS OWNER SHOULD KNOW BUT UNFORTUNATELY IT IS RARELY TAUGHT IN ANY CLASS ROOM, COURSE OR EDUCATIONAL FACILITY (A FACT THAT MAKES ME MAD)
It is the under lying reason businesses fail to make a profit and before you learn anything about business everyone should know how to make a profit from their product or service.
The Golden Secret is called Gross Profit Margin
Your Gross Profit Margin (sometime called GP or Margin) is simply the amount of money you make after all the costs (Cost of Sale or COS) is taken out of the sale price.
If I have a kids toy that cost me $7.20 to make, market and sell and I sell it for $12.30 my Gross Profit is $5.10 but it’s the Margin (or percentage of the sale that is profitable) that I must keep a track of.
If my Margin drops because of higher manufacturing or material costs then my business will begin to suffer and if I don’t track the Margin then over time I could loose my business as is the case with many businesses that close down.
Business owners will give many different excuses for closing down but in my experience it is usually poor management and not tracking Margins that get them into trouble in the first place – knowing your Margin is also the starting point and fastest way to get out of financial problems, therefore the reason I call it the Golden Secret
To work out your Margin you must take the Sale Price minus the Cost of Sale (Equals the Gross Profit) then simply divide the Gross Profit by the Sale Price this will give you your Margin
Here’s the formula
Sale Price – Cost of Sale = Gross Profit
Now take the Gross Profit and convert it into the Margin
Gross Profit ÷ Sale Price = Margin
Lets use the numbers for the as an example
$12.30 – $7.20 = $5.10
$5.10 ÷ $12.30 = .0414 or 41.4%
Now you know how to work out your margin we can use this number to work out other vital measures like working out your break-even sales, budgets and sales targets etc… but that’s another lesson for another day.