Why It’s Important To Understand Your Profit Margin In Business

Posted by: lukwago J in Business August 16, 2020

This is my definition of profit, is a financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing something.

“Record pre-tax profits”

Today I want to talk about running capital. For every business to be successful, there is running capital that is involved in day to day running of the business. This capital is not profit. Some time it comes inform of advance payments.

Those who are into tenders understand that when you are awarded a tender, you are given either 30% or 45% deposit of the tender value. Please take note, the purpose of this money is to help you to mobilize required resources for the tender, if it supplies, the money must be used to purchase the first consignment of the tender.

If it is construction, the money must be used to mobilize the equipments and materials to the site.

This is not profit. It’s far from regarded as profit. So there is no way it can be used for personal expenses such as buying a personal car or a personal house. We often see this happening in Africa and we fail to deliver. We become incompetent.

Same applies in any other business. Small business, we have some circumstances where we have clients pay in advance because we are always under stocked, so we receive and invoice money for items that are not in stock.

That advance payment is not profit. In most cases retailers we are selling our items at 20 to 30 % which means if you receive $100 of sales what is yours is just $30. The rest of the money is running capital. So never fool yourself to think that you have $100.

This is where most small scale business go wrong. They treat all income as profit so they spend money forgetting running capital. When then is no adequate running capital business operations seize. There will be no generation of income. There won’t be profit and eventually the business will be in serious debt and collapse.

That’s why most business people loose properties when the business crushes.

It is important to understand your profit margin and be able to understand how you calculate your profit.

Not every income that comes into business is profit, profit is only calculated by removing all expenses involved in the running of the business. Direct and indirect costs. Every expense must be accounted for. No matter how small it is. Very small amount accumulate to be very big figures in time.

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