Never Calculate Profit Margin Again And Grow Your Profits
It is no wonder there are a ton of task management applications business owners can choose from. We have so much to manage! Business owners often oversee operations, marketing, sales, administration, and accounting.
Accounting can be one of the trickiest tasks for business owners due to the complicated reconciliations, equations, and stress that surrounds managing finances.
We work with our clients to provide solutions that simplify their work and improve the quality of accounting operations. One of our favorite strategies to implement is the Truly Profit Plan.
We will get into the plan in a minute but let’s first discuss one of the most difficult parts of managing your accounting, which is the profit margin. Profit margin is difficult to manage because it combines accurate pricing with expense management. If one of these two is off, then you can expect your profit margin to be less than favorable.
Profit Margin is calculated using a 3 step process.
Begin by referring to your income statement and subtract expenses from revenue.
Revenue – Expenses = Net Income
Next, take your net income and divide it by your revenue.
Net Income / Revenue = Profit Margin
Multiple your Profit Margin by 100 to get your profit margin percentage.
Profit Margin x 100 = Profit Margin Percentage
Depending on the type of business you operate this can be a fairly simple or complex equation. Multiple factors should be considered when making this calculation. Like do you have multiple service offerings or products? Expenses and pricing can also fluctuate each month if you charge by the hour or have seasonal products.
All these types of scenarios need to be considered when looking at the profit margin.
How We Simplify Profit Margin
With our Truly Profit Plan, you can work smarter and not harder. You need information quickly without sacrificing the quality of the content.
As you saw in our equations above, you begin with revenue and subtract expenses. In our process, you are going to start with revenue and subtract profit.
The profit you subtracted should then be set aside in a separate bank account.
You will then follow the same process for owners’ pay, taxes, and operating expenses. Once you have your revenue separated into those 4 categories, you will have your budget for the period.
With this process, we are determining our profit margin, profit, and budget. Compare this with calculating your profit margin. While it can be useful, you will find yourself calculating your profit margin repeatedly and for different items.
With the Truly Profit Plan, you only need to calculate the correlating percentage and transfer the funds.
How to Set up Your Truly Profit Plan
Now that you understand the philosophy of the Truly Profit Plan, let’s discuss how to set it up for your business. Begin with determining your percentages for each category. We recommend:
- Owners Pay – 50%
- Taxes – 10%
- Profit – 10%
- Operating Expenses – 30%
Setup 4 bank accounts reserved for each of the categories above. Every month when you collect invoices or reconcile your bank accounts, calculate the correlating percentage and transfer those funds to that bank account.
Consider this example. Let’s say in Month 1 you made $100,000 in revenue. Great work. It is now time to create your budget for Month 2 and transfer funds. If we calculate the percentages and transfer the funds, your bank accounts should look something like this:
- Owners Pay – $40,000
- Taxes – $10,000
- Profit – $10,000
- Operating Expenses – $40,000
By simply transferring those funds over, we know your profit margin is 10%. We also know our expense budget for Month 2 is $40,000. We have set aside $10,000 in taxes and can expect our owners to get paid $40,000.
This process simplifies your financial equations and allows you to quickly get back to work without sacrificing the quality information you need.
How To Grow Your Profits Using The Truly Profit Plan
Now that you understand the inner workings of the Truly Profit Plan, we must point out how this can actually help you grow your profits.
In our above example, we show how you can separate your revenue with a 10% profit margin. This is only a suggestion. If your goal is to aim for a 15% profit margin or higher, we would recommend finding ways to decrease your operating expenses.
Not only does the Truly Profit Plan encourage you to rethink how you spend your money, but it encourages you to make profit a priority in your business.
If you are ready to begin implementing the Truly Profit Plan we recommend downloading our Ebook, The Truly Profit Plan for Business Owners. This guide will show you set by step how to implement the plan into your business with helpful worksheets to fill out along the way.
Download the ebook by clicking on the button below to get started.