ESYB2 054 - How to Calculate Profit Margin
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[00:00:00] Now let's discuss the profit margin. We're going to cover the definition. It's essentially a measure of your company's profitability as a percentage, not in dollar amounts. Another way to look at it is to see how truly profitable is the business. And I'm just giving you a few perspectives so it's not confusing because I know these terms can be very confusing.

So it's what percentage of sales End up becoming actual profits because you can make a lot of sales, but what if it costs you more to run the business than you get sales? Well, that doesn't help. So here's an initial example. Let's say if you have 10 percent profit margin, what does that mean? It means that for every dollar that comes into the business as revenue, you only keep 10 cents.

As a profit. Hmm. The little low, right? You got a dollar. Oh no, I only got 10 cents. So you want to [00:01:00] do what you can to raise your profit margin. And for different businesses, there's. different expected profit margins. We'll talk about that in a second, but let's do the formula. It's essentially your net profit divided by revenue.

That's it. It's relatively simple as a formula. So that's how you calculate it. But now I'll show you, how do you know what to expect for your business? So I literally just went to Google and I said, profit margin for a bar. And it gives me some articles. Now, you have to try to determine the credibility of the website that's giving this to you.

So, ToastTab, I've never heard of them. They might be credible, they might not. I just personally never heard of them. But they give you some ideas of what profit margins can be expected. Now, let's go, uh, CoffeeShop. They give you average profit margins for CoffeeShop. And you have to click on it, but essentially This article probably will explain to you how the coffee shop industry works.

And what's going to happen is I'm [00:02:00] going to get rid of the coffee shop here in the search. And what you'll see is you can actually do any business. So whatever your business is, try to type this in just like this and you'll see what the expected profit margin is. If you haven't started your business, this is almost irrelevant because this is something you would calculate.

When your business is up and running, but if your business is up and running, then you, of course, you want to understand what your current profit margin is and compare it to industry expectations to see whether you are in the expected range. And always, of course, think about what can you do to increase profitability, which is basically how do you minimize costs and increase revenue.

