Profit is not a particularly complex ratio, but is considered to be one of the most important features of business efficiency. There are many factors that affect profits, but not all of them are quantitative and, therefore, not obviously, the proposed variables of the computation.
If you are a retailer, for example, your brand and marketing strategy affect Your profit indirectly through income. Thus, virtually all aspects of the company – from management to floor sales tactics – influence on Your profit.
What Is The Profit Margin?
There are different kinds of profit – gross and net – but this description is focused on net profit margin because there are more factors that affect the net profit.
Net profit margin-the ratio of net profit relative to revenue is calculated by simply dividing the sales profit. This is a quick way to determine what percentage of the sale price that your company keeps after accounting for costs, which went up for sale.
Net Margin = Net Profit / Revenue.
Net profit margin is the best presentation about the financial health not only income. It is possible to increase revenue for Your company while reducing Your profit, it means that the company becomes relatively less effective. It is impossible to have a net profit, if your company loses money.
The most obvious, easy to identify and wide figures that affect your profit, your profit, your income from sales and costs of goods. On your statement of profit and loss, look at net revenue and cost of sales, for example, on a very General view of these basic variables.
Digging a little deeper, and the selling prices are very important factors. Increase net profit margin by doing a good job control your costs on a product, and you can increase the sales price, at the same time.
Inventory ID issue. Although inventory is recognised as an asset on the balance sheet, You record the sales income until the transaction actually took place. Devalued stocks may adversely affect the profitability of the company and disposal of reserves through increased sales can help profit.
Undervalued variable and one that you have very little control over – taxation, how taxes affect net income.
There are too many factors to enumerate in a short article, but consider all the elements that can influence the sales, such as market share, effective advertising, seasonal changes, consumer preferences, the company’s management, sales, bonus programs, training programs for employees and competition strength.
Many analysts and investors fix the profit margin so seriously, because it can contain a huge amount of information about the company in an effective, easy-to-understand number.