It is easy to know that a business that is operating at a loss is in need of intervention to get it profitable, but what about a business that is doing well? How do you know if things are still improving or if your costs are in line with your income?
The Gross Profit Margin percentage is a great way to figure out if your costs of goods are in alignment with your income. Often businesses spend too much or too little on cost of goods in relation to the income produced. To find the gross profit margin percentage, take the gross margin (income minus cost of goods) and divide by income. If the percentage is going up it indicates you are getting better at creating more income with less or the same costs, which is good. If it is going down, then your costs are going up but your income is staying the same or going down, which isn’t the direction to go in to keep your business profitable. If the profit margin is staying steady, your business is not growing and something might need to be done to get to the next level. The problem is this Key Indicator only works with businesses that have direct costs such as retail or manufacturing – most service industries will not benefit from tracking this kind of indicator.
The Net Income Percentage, or the Operating Income Percentage Key Indicators are useful to track for all industries and they’re especially helpful with a service based business, where the gross margin percentage is not as helpful. Up, down and steady are indicated the same as the gross margin percentage. With the Net Income Percentage, you divide the net income by the income. Operating Income Percentages are based on the net income too, however you add back in expenses from tax and interest payments, and then divide by the income.
If you would like to see how your business is doing and get a custom Key Indicators report specifically tailored to your business, please call us. We will help you figure out which Key Indicators are best to track for your business and help you make sense of how they are affected by fluctuations in different business expenses.