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18th September 2019

Understanding profit margins

Do you struggle with understanding profit margins?

When it comes to understanding profit margins, many business leaders struggle to make the right decisions.

Understanding profit margins

In this blog, we explain in easy to understand terms the trick to understanding profit margins.

After all, profit is profit. Right?

Yes, but some profit is better than others.

For example, let’s say your business has two products, A and B.

If A generates £500 income and B earns you £200, on the face of it selling more of A than B makes sense.

But what if A takes 20 hours to make and sell but B only takes 5?

The profit per hour for A is £25 whereas the profit for B is £40/hour.

In a 40 hour week you could make £1,600 selling Bs or £1,000 selling As.

Suddenly B is the better bet.

Working for 48 weeks of the year the difference is £28,800.

Or to put it another way, having the right mix of products or services can take you from good to great.

Understanding how your Profit & Loss Account works is the first step towards achieving this.

So whether you have a products or a service, knowing how much it costs to generate a profit – whether it’s in materials, labour, time or any combination of these – can make a huge difference to the profitability of your business.

Have you got a question about understanding profit margins? Get in touch with your questions and we’ll add it to our list of topics to discuss in our Business Fundamentals series.

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