Gross profit margin and net profit margin are two of three common profit margins derived from your company's income statement. The other is operating profit margin. While each margin assessment offers different financial assets, they collectively show how well you earn profit from revenue.
Low Gross Margin Basics
Gross profit margin equals gross profit divided by revenue. This shows the simplest but most important measurement of profitability, according to The Business Owner, a website for small and mid-sized businesses. A low gross profit margin means your ratio percentage is below industry norms and potentially down from your company's prior periods. In essence, you aren't generating strong sales prices relative to your cost of goods sold, or COGS, which are your costs to make or acquire products. This is a problem, since you need strong gross profit to achieve operating and net profits.
A low or falling gross profit margin is a very concerning situation for your business because it inhibits bottom line results and negatively impacts cash flow. To improve low gross profit margin, you need to increase customer demand and revenue or reduce your COGS. More marketing, while a cost, doesn't affect COGS and can help drive stronger revenue performance. Both training and emphasis on sales processes can help as well. On the cost side, you can negotiate better costs with vendors or look for lower cost options of similar quality.
Low Net Margin Basics
Net profits are your actual bottom line earnings in a given period after all COGS and fixed costs are removed and all irregular revenue and expenses have been accounted for. Net profit margin equals net profit divided by revenue. This ratio is typically lower than the gross profit margin since more costs are considered. Again, a low margin means your net profit efficiency is below industry norms. A falling net profit margin over time is also problematic, though a high one-time revenue or cost can dramatically alter one periods net profit and margin.
While investing in marketing can improve gross profit margin, this improvement is lessened on net profit margin because you account for the additional marketing expense. Along with gross profit improvement, you can also impact the net profit margin by reducing other fixed costs. They include building and equipment rental fees, utility costs, marketing and labor. Optimizing use of electricity to operate equipment or negotiating better rates on rent are specific measures which could improve a low net profit margin.
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