Profit margins are one of the clearest indicators of a business’s financial health. They show how much of your revenue remains after covering costs, and they help you assess whether your pricing, expenses, and operations are aligned for profitability. Understanding how to measure and improve your margins can make the difference between simply staying afloat and achieving sustainable growth.
1. Understanding Profit Margins
A profit margin is expressed as a percentage and represents the proportion of revenue that remains as profit after costs are deducted. There are three main types to consider:
- Gross Profit Margin – The percentage of revenue left after subtracting the direct costs of goods or services sold.
- Operating Profit Margin – Takes into account both direct costs and operating expenses such as rent, utilities, and salaries.
- Net Profit Margin – Reflects the bottom line after all costs, including taxes and interest, have been deducted.
Each metric gives different insights into your business performance, so it’s important to review them together.
2. Measuring Your Profit Margins
To calculate a profit margin, divide profit by total revenue and multiply by 100. For example, if your business earns £200,000 in revenue and your net profit is £40,000, your net profit margin is 20%. Tracking these figures regularly allows you to spot trends, compare performance against industry averages, and make informed decisions.
3. Identifying Margin Pressures
A shrinking margin can result from several factors, including rising supplier costs, inefficient operations, or pricing that doesn’t reflect the value you provide. Regularly reviewing both your income and expenses can help pinpoint where profitability is being eroded.
4. Strategies to Improve Profit Margins
- Review Pricing – Ensure your prices reflect both your costs and market demand. Don’t underprice just to win business.
- Control Costs – Negotiate better deals with suppliers, reduce waste, and streamline processes.
- Increase Sales of High-Margin Products or Services – Focus on offerings that bring in the highest returns.
- Boost Productivity – Use technology, automation, and training to improve efficiency and reduce labour costs per unit of output.
5. Using Margins to Guide Business Strategy
Profit margins are not just a financial metric — they’re a decision-making tool. If a particular service has consistently low margins, you may choose to discontinue it, repackage it, or increase its price. Similarly, healthy margins can indicate areas where further investment could bring even greater returns.
Margins as a Measure of Success
Keeping a close eye on profit margins ensures you have a clear picture of your business’s financial strength. By regularly measuring, analysing, and acting on margin data, you can make smarter choices that lead to sustained profitability. With the right strategies, improving your margins can directly translate into improved performance, greater stability, and stronger long-term growth.
