As a Small Business, How Do You Maximize Profit Margins?

By: First Union

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As a Small Business, How Do You Maximize Profit Margins?

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So where do your profit margins currently stand? This is a question that baffles some business owners—either they're 100% not sure, or they don't know where those profit margins should be, to begin with. And the type of industry you're in is yet another factor to consider as far as where your profit margins should sit.

Calculating where your profit margin should be is a process that entails several moving parts. Ultimately once you have determined this, that profit margin will say quite a bit about your overall business plan.

There are of course those businesses that have fairly low-profit margins: grocery and landscaping, for instance, are two such industries where the profit margins are generally in the 2-3% range. Whereas, something like an accounting firm or a medical practice could see a profit margin closer to 20 percent or more.

So what factors go into a profit margin; what sorts of things will impact yours? A few of the main drivers include the cost of labor, equipment maintenance and repairs, your location, inventory considerations, and use of your assets, among others. Thus you can rest assured that no two companies will have the same profit margin. Therefore basing yours on that of your competitor is never a good idea.

The problem becomes one of the small business owners setting their profit margins too high, and in part, this is spurred by comparing one firm to another. You also have to keep in mind overall goals moving forward when calculating your profit margin. Are you planning to expand? If you are looking to grow and ramp up revenue, then your target needs to adjust accordingly.

Also, think about scale in terms of your business…If you're a relatively new company, not many employees, and low overhead, your profit margins should be on the higher side, versus a fairly entrenched large company with a monstrous payroll and higher expenses such as rent, insurances, and taxes.

Wherever your profit margin is, First Union Lending can certainly help you achieve your goals. Our business loan programs have been helping small businesses across the country succeed. Call today to see what we can do for you!

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