If you are running a business, you must understand these metrics like the back of your hand.

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Gross Sales/Revenue

Total money generated by your business.

Net Sales/Revenue

Net sales is the total amount of revenue a business generates from sales after accounting for discounts, customer returns, and other deductions.

What Are Net Sales and How Do I Calculate Them?

Paying attention to the difference between the above 2 will help you uncover important insights related to:

• Returns → Product Issues
• Discount → Sustainability

https://x.com/SeanEcom/status/1751327814048166006?s=20

Profit Margins

To run a successful business, profits are crucial. But not all profits are the same.

• Sufficient profits to cover operating expenses and support yourself as a business owner may be enough for modest goals.
• To expand your business, hire more employees, and invest in research and development, sustained profit margins are needed.
• Profitability must align with long-term objectives and the total cost of business growth.
• Different profit goals are required for different business aspirations and strategies.

<aside> 💡 Different businesses/products/services/industries have different profit margins in general. Staying informed about it for your business niche, helps you set up right expectations.

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3 types of Profit Margin you need to understand:

Gross Profit Margin

Gross profit margin is a key metric that measures the difference between sales revenue and the costs of goods sold (COGS), including direct product expenses like raw materials, packaging, and direct labor (i.e., labor related to manufacturing or selling your products).

Here's how to calculate gross margin:

• 📐Subtract the cost of goods sold from net sales.
• Divide the resulting number by net sales to get the ratio, expressed as a percentage.
• For example, if sales are $8,000 and costs total $6,000, the gross profit margin would be 25% ($2,000 divided by $8,000 multiplied by 100).

Gross profit margin is typically used for a specific product or product line, helping a company make pricing decisions.

A low gross profit margin may indicate the need to charge more for a product to ensure profitability.

Operating Profit Margin

Operating profit margin is a profitability metric that considers both the revenue and the cost of goods sold (COGS) as well as other fixed costs associated with running a business, such as rent, office supplies, and administrative expenses.

Here's how to calculate operating margin:

• Subtract the cost of goods sold (COGS) and administrative expenses from net sales.
• Divide the resulting number by net sales to get the ratio, expressed as a percentage.

Operating profit margin is useful for comparing your business performance with competitors and peers.

<aside> 🚨 Higher Operating Profit Margin allows the room for significant Marketing Budget for your business growth goals.

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Net Profit Margin

Net profit margin is a comprehensive measure of business profitability that takes into account all expenses, including COGS, administrative costs, Marketing Costs, taxes, interest, and depreciation.

It reflects the percentage of net income relative to total sales, making it a useful indicator of overall financial health.

Here's how to calculate net profit margin:

• Divide the company's net income (profit after deducting expenses from gross income) by total sales.
• Multiply the result by 100 to express it as a percentage.

For example, if gross sales are $150,000 and expenses are $75,000, the net income is $75,000. Dividing $75,000 by $150,000 gives 0.50. Multiplying 0.50 by 100 equals 50 percent, which is the net profit margin.

What is a good profit margin for?

A desirable profit margin can vary depending on the nature of the business, but typically, a net profit margin of 10-20% is considered a favorable target to aim for.

Is profit margin more important than profit?

🔥 A Very very important understanding.