Optimizing profits and profitability are core financial goals of a for-profit business. To increase profits, your company must generate greater revenue without taking on equivalent costs. While it is possible to increase profits without increasing margins, efficient companies can often do both.
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Profits are the difference between a company's revenue and its expenses. Typically, companies evaluate gross profits, operating profits and bottom-line or net profits. Increasing profits at any of these levels is based on increasing revenue, lowering costs or both .
- Gross profit: Your gross profit is revenue minus costs of goods sold. One approach to boost profit is to generate more revenue while maintaining constant COGS. You could also negotiate lower COGS with suppliers or look for lower cost options.
- Operating profit: Your operating profit is gross profit minus operating expenses, such as building payments, utilities and marketing expenses. Along with higher revenue, a company can boost operating profit by reducing its cost structure in one or more of these fixed expenses.
- Net profit: Your net profit is the final result after adding irregular revenue and expenses to
operating profit. It is possible to have high net profit relative to gross or operating profit if you report the sale of investments or assets.
Increasing Profit Margins
A profit margin is a ratio comparing profit to revenue. Gross margin, for instance, is gross profit divided by revenue. Operating margin is operating profit divided by revenue. A business could increase profit -- but not profit margins -- in a given period if it takes on a higher proportion of costs to revenue than it previously had. The goal of improving margins is to enhance efficiency in turning revenue into profit.
To ensure that your profit margin grows, the business must generate revenue in a more efficient way. Assume you had $100,000 in revenue and $75,000 in operating expenses in a period. The operating profit is $25,000 and the operating margin is $25,000 divided by $100,000, or 25 percent. If revenue increases to $225,000 and costs only increase to $150,000, your profit is $75,000 and your operating margin is $75,000 divided by $225,000, or 33 percent. Raising prices or lowering COGS are often key drivers of gains in profit margins. since overhead costs remain steady in many cases.