Understanding what is a good profit margin for your business can be difficult, as every business has its own set of needs and costs. However, knowing what a good gross profit margin is can help you take your business to the next level.
Integrated Cash Logistics is here to help you learn more about what profit percentage is good, how to improve profit margin, and more. Understanding these terms ensures you feel empowered in all of your business decisions so you can streamline your cash and profit processes.
From retail to restaurants and banking, CashSimple® is the right solution for any industry.
What Is Profit Margin?
However, just what is a profit margin? In simple terms, typical business profit margin numbers refer to how much money your business has left over after tackling any other costs or expenses. In theory, a good profit margin is when a business makes more money than it spends, although it is a bit more complicated than that when you get into the specific details.
Profit margin is another ratio like cash forecasting that helps businesses understand their overall financial stability. Many investors, banks, and other parties will directly look at this number to determine if they want to invest in your business.
How to Calculate Profit Margin
While the idea of a profit margin is simple by itself, there are actually multiple types of profit margins to keep in mind for your business. These include:
- Gross profit margin
- Operating profit margin
- Net profit margin
To get a complete picture of your business’s profitability, understanding these terms and how to calculate them is imperative.
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Gross Profit Margin
Gross Profit = Revenue – Cost of Goods Sold (COGS)
Gross Profit Margin = (Gross Profit ÷ Revenue) x 100
Your gross profit is determined by subtracting the amount of goods (or services) that were sold from your overall sales. The cost of goods sold (COGS) is anything that is necessary to spend on manufacturing, production, and distribution of your products and services. This often includes expenses such as:
- Raw materials
- Costs associated with factory/goods production
- Direct labor wages
After you determine this number, your gross profit margin is calculated by dividing your gross profit by your revenue and then multiplying this number by 100 to create a percentage. In determining what a good gross profit margin is, industry specifics really matter, which we’ll dive into later.
Operating Profit Margin
Operating Profit = Revenue – Cost of Goods Sold – Operating Expenses
Operating Profit Margin = (Operating Profit ÷ Revenue) x 100
An operating profit margin is calculated by subtracting the COGS from your revenue (just like the gross profit margin), and then further subtracting your operating expenses from this number. This number accounts for the costs of running your business in general, which is imperative for understanding your business’s long-term sustainability.
This can vary depending on the size of your business and where you need to conduct your manufacturing or other production needs. For example, what is a reasonable profit margin for a small business is going to be drastically different from what it will be for a more established company. This is because of startup costs, where the company is operating, and more.
Net Profit Margin
Net Profit = Revenue – Cost of Goods Sold – Operating Expenses – Interest – Taxes
Net Profit Margin = (Net Profit ÷ Revenue) x 100
Lastly, net profit margin is what you get after you subtract your COGS, operating expenses, interest, and taxes from your overall revenue. This is your true profit margin, as it fully accounts for all of your direct and indirect costs. A good profit percentage can be determined by your net profit margin, and many other parties use this number to assess your bottom line and financial viability.
Outsourcing to a solution like CashSimple® can solve the hidden costs of cash-in-transit services.
What Is A Good Profit Margin?
How much profit should a business make? This really depends on the industry, making it difficult to compare average business profit margins across the board. What is considered a good net profit margin for one company will not necessarily be the same thing for other businesses.
For example, many businesses have higher business costs and overhead, which will result in a lower profit margin, whereas other companies that don’t have these costs will have a higher profit margin. However, this doesn’t mean that the company with the higher profit margin is making more money than the other business.
Average Profit Margin By Industry
The only way to get a true grasp of profit margins for your specific business is to compare the average margins by industry, along with how much your business “should” be making, depending on how long it’s been around, what your costs are, and more.
Below is a list of average profit percentages for many business sectors as of January 2024.
| Apparel | 51.93% |
| Auto & Truck | 12.45% |
| Auto Parts | 15.01% |
| Bank (Money Center) | 100.00% |
| Banks (Regional) | 99.36% |
| Beverage (Alcoholic) | 45.25% |
| Beverage (Soft) | 54.52% |
| Brokerage & Investment Banking | 62.06% |
| Business & Consumer Services | 33.50% |
| Computer Services | 25.52% |
| Electronics (Consumer & Office) | 32.36% |
| Electronics (General) | 27.36% |
| Environmental & Waste Services | 34.65% |
| Food Processing | 24.53% |
| Food Wholesalers | 14.86% |
| Healthcare Products | 55.64% |
| Healthcare Support Services | 14.37% |
| Hotel/Gaming | 59.52% |
| Insurance (General) | 33.93% |
| R.E.I.T. | 57.48% |
| Recreation | 36.73% |
| Restaurant/Dining | 32.43% |
| Retail (General) | 30.86% |
| Retail (Grocery and Food) | 25.54% |
| Software (Entertainment) | 63.43% |
| Transportation | 25.12% |
As you can see, restaurant and retail businesses tend to have a lower profit margin than other companies, although this is simply because they have more overhead costs for products, materials, labor costs, and more.
Understanding what are good profit margins for a business can drastically help you manage your own business – and ICL is here to help.
Schedule a demo to learn how ICL’s cash capture technology simplifies how you control cash.
Profit Margins For New vs. Existing Businesses
After looking at the profit margin numbers listed above, you may see that your business’s profit percentages are less than what’s shown and start worrying. However, don’t fret – it’s also important to consider how these numbers will change for new vs. existing businesses. Also, what is a good profit margin for a small business will vary drastically from a larger business.
Newer companies often have lower profit margins to start with, as they’re only just beginning their business venture. They’ll have startup costs, increased training/wage costs for hiring an entire new staff (if needed), and more. As your business grows and matures, your profit margins will evolve, slowly increasing as your revenue grows as well.
If you’re having trouble determining how to handle your cash and get the most out of your business, reach out to Integrated Cash Logistics to learn more about how our CashSimple® solution can simplify your cash management processes.
5 Ways to Improve Profit Margins
Now that you have a grasp on what is a good net profit margin, it’s time to learn how to increase profit margins. Many practical strategies you can implement to improve these numbers, no matter what industry you work in. These five tips will help you enhance your profitability over time:
- Review and Adjust Business Processes: Are you spending lots of time and money on having to make bank runs? Are you losing revenue from decreased employee productivity or training? Review business practices and discover how solutions like CashSimple® can streamline cash handling and other cash management needs to improve your operational efficiency.
- Change Price Strategy: Changing your pricing can help you increase revenue – even if you decrease the price of some products or services. For example, if something is priced too high, it can scare off customers. Or, if you find that a product keeps selling off the shelves, you can slightly raise the price to improve your ROI.
- Optimize Product or Service Mix: If you realize that a product or service is costing more to produce/sell than it’s worth, it may be worth optimizing your business model to get rid of this and focus on something that will be more profitable.
- Build Brand Loyalty: Brand loyalty is an important part of any business. If your customers truly engage with and care about your brand, this will help increase profit margins over time. A few examples of how to do this include creating a rewards program, building a brand community, and sharing your brand’s story and voice.
- Optimize Inventory Management: One way to optimize your inventory management is to look into just-in-time inventory, which refers to only buying products when they are needed in smaller quantities. This helps get rid of the potential of these products spoiling or not being in “season” anymore. Looking into optimizing your inventory can drastically reduce any money that’s lost.
Improve Profit Margins with Optimized Cash Handling From CashSimple®
Are you looking for ways to improve your business’s profit margins? Look no further than Integrated Cash Logistics. Our cash capture technology and management solution can help you fully understand how much money you’re spending, provide an alternative to provisional credit, and streamline your change orders. CashSimple® eliminates the expenses associated with other smart safes. Our all-inclusive, single point of contact handles everything you need related to cash so that you can spend more time doing what you need to – running your business.
Reach out to our team today to schedule a demo and learn more about how cash-handling practices from ICL can help you increase profit margins and run your business without stress.
