Your sales are growing. Revenue looks healthy. There’s plenty of work coming through the door.
But how much of that money are you actually keeping?
At Oculus Group Accountants in Tweed Heads, we encourage business owners to look beyond the top-line sales figure. Two numbers that can tell you much more about the health of your business are your gross margin and net margin.
They sound similar, but they tell very different stories.
What is gross margin?
Gross margin shows how much money is left from your sales after paying the direct costs associated with delivering your product or service.
For example, imagine your business generates $500,000 in sales and has $300,000 in direct costs, such as materials, stock or direct labour.
That leaves a gross profit of $200,000 – or a 40% gross margin.
Why does this matter?
Because your gross margin can help reveal whether your pricing and direct costs are working.
A business can increase sales significantly but actually become less profitable if the cost of producing those sales rises too quickly. This is sometimes referred to as margin compression.
It’s why we often tell clients that more revenue doesn’t automatically mean more profit.
What is net margin?
Net margin goes further.
After calculating gross profit, the business still needs to pay its other operating expenses. Depending on the business, these might include rent, administration wages, insurance, accounting fees, software subscriptions, marketing, vehicle costs and other overheads.
Once the relevant expenses are taken into account, you arrive at your net profit.
Your net margin shows how much of your revenue ultimately translates into profit.
For example, a business might have a healthy 40% gross margin but discover that its overhead expenses have increased substantially. Its net margin could be only 5%.
On $500,000 of revenue, that’s a significant difference.
Why should you monitor both?
Looking at gross and net margins together can help you identify where profitability is being lost.
If your gross margin is declining, you might investigate your pricing, supplier costs, labour efficiency, discounts or product mix.
If your gross margin remains strong but your net margin is falling, the problem may be further down the Profit & Loss Statement. Overheads may have increased, subscriptions may have accumulated, staffing structures may have changed or other expenses may be growing faster than revenue.
That’s why simply comparing this month’s sales with last month’s doesn’t tell you the whole story.
Turn your numbers into better decisions
Margins aren’t just figures for your accountant to review at tax time.
Used properly, they can help you make decisions about pricing, staffing, purchasing, expenses and growth.
At Oculus Group Accountants, we help businesses in Tweed Heads, the Tweed Coast and beyond understand what sits behind their numbers – and what those numbers could mean for their next move.
Are your sales increasing but your profits aren’t following?
Talk to the team at Oculus Group Accountants in Tweed Heads about reviewing your margins, costs and overall business performance. A clearer understanding of where your money is being made – and where it’s being lost – can help you make more informed decisions about the future of your business.
