You are in business to make money! So am I, actually, so we have something in common. But what does it mean to “make money”?
The amount of cash you bring in is your revenue, but that is not the money you make as it costs money to generate revenue. When we talk about making money, we are usually talking about profits.
The most important metrics to track about your business are your margins. Your margins measure your profitability and are calculated by comparing your profits to your revenue. Typically, margins are measured as a percent of revenue so that you have an easy way to judge the profitability of your business.
Why are Margins so Important?
Tracking your profitability over time is essential to understanding the viability, growth and future prospects of your business. Tracking the amount of your profits (or losses) alone is not enough. Your profit might be $10,000 one year and $100,000 the next, which sounds like you are growing well! However, if your revenue was $20,000 the first year and $500,000 the next, then you made less profit from more revenue!
Margins can be complex to calculate and understand as they come in many flavors. We’ll cover the most common ones and their applications this week.
Tomorrow we’ll get started by talking about the difference between Gross and Net Margins, two metrics you never want to confuse!
Quote of the Day: “Cash Rules Everything Around Me” – Wu-Tang Clan