When inflation makes it difficult to maintain your profit margins what can your accountant add?
Inflation is much on the Government's mind at present and equally so the business community.
When inflation is high, each pound in our pocket buys fewer goods and services, so inevitably businesses may find it difficult to maintain their profitability. All the more reason owners need to have a tight grip on their profit margins.
Yet, sometimes profit margins can look deceptively healthy, when inflation might be affecting these. Inflation puts pressure on companies, particularly on smaller businesses. Not least when it comes to your company's purchasing power.
It takes an expert eye to determine how you are performing financially, to scrutinise your operating costs, to know how your company is spending money, to consider your cash flow and determine how much money you are making.
And at the root of all these is the monitoring and maintenance of your profit margins.
Gross profit margin, operating profit margin, and net profit margin are the main margin measures used to analyse the activities of a company. Yet, each provides a different perspective on a company's operational efficiency.
Gross profit margin analyses the relationship between gross sales revenue and the direct costs of sales. It seeks to identify how efficiently a company is producing its product.
Operating profit margin shows a company's ability to manage its indirect costs as they impact the bottom line. It shows how a company is investing in areas it expects will help to improve its brand and business growth. These may include costs relating to R&D, marketing campaigns, general admin, as well as depreciation.
Your net profit margin, after all costs and expenses have been taken into account, is arguably the true measure of success, where understanding of how your sales translate into profit gains greater clarity.
To stay on top of these, so you can stay on top of your business, the onus on your accountant to put them in proper context could be fundamental as to how your operating profit margin is reported and received.
Your accountant can also dig down even deeper to discover other factors that might have impact on your profit margins.
For example, it may pay to work out the profitability of each customer by establishing how much margin they contribute to your business. Sometimes the smallest customers and the easiest to conduct business with can provide you with the most margin and profit.
Equally, your accountant can review the margin levels on each of your products and services and determine which ones need to be dropped because they are contributing poorly to your bottom line.
Similarly, your accountant can help you optimise your current price levels by reviewing these across all products and services and determine if these are in line with the market.
So your accountant can have a huge role to play in effectively guiding and advising you through the many market and business factors which may affect each of the three margins.
To accurately reflect your current situation, to put all in the correct context and hear how our efforts can transfer positively into your business as more profit, contact GSM today on 020 7935 3793