When the going gets tough, the tough check their margins

2022 had its ups and downs. And with the inflationary waves that are rippling through the economy, it looks as though 2023 will present some challenges. Businesses across the UK are searching for ways to shore up their supply chains and manage their costs. As people tighten their belts further, the impact will be felt by everyone, regardless of whether you’re B2C, B2B, large, or small.

Of course, this perfect storm of world activity has many implications, but where businesses feel it most is in their profit margins. And it’s going to require some steadfast discipline to maintain a positive bottom line.

But what will this entail? Profit is something we’re all familiar with, but to protect your profits as a business owner you will need to clearly understand what your ‘profit margin’ is, so you can take the steps you need to take.

What is profit margin?

This may be obvious to a seasoned business owner but it’s worth clarifying.

Profit margins are a key measure of the financial health of your business. Where cashflow keeps your business running, profit margins are the slice of your output that make it all worthwhile. It is your profit margin that puts extra money in your bank, above what you spend to produce products and services and run your business.

There are three main types of profit margin – gross profit margin, operating profit margin, and net profit margin. Each one is expressed as a percentage and is calculated using different variables in your business.

The first, gross profit margin, is simply your overall gross revenue minus the cost of goods used to make your products. It does not include costs such as administration costs. The second, operating profit margin, looks at revenue and deducts the cost of goods, but it also deducts admin costs and sales expenses, plus it may also account for certain asset depreciation; it doesn’t include taxes and other non-operational costs. And the final one, net profit margin, gives you a proper indicator of your bottom line, for it also takes into account income from other sources and all your expenses, including taxes.

What do your profit margins actually tell you?

In their way, each one tells you how much of what you’re bringing in is actually adding to your bottom line. Let’s face it, it sounds a whole lot better to hear that 90% of your efforts are converting into additional cash rather than just 5%, eh? And that’s what a percentage profit margin tells you.

Different businesses naturally have different healthy profit margins. For example, a successful consulting business may easily be enjoying a profit