Written on the 8 February 2014 by National Australia Bank
Part 3
Use your profit margins to benchmark your business
You can use your gross and net profit margins as benchmarks to gain a clearer picture of your performance in two ways:
Internal benchmarking
Compare your profit margins to previous periods to see where your selling prices are coming under pressure or costs are increasing.
Compare profit margins on individual product lines to see which products are the most profitable.
External benchmarking
Compare your profit margins against those of similar businesses in your industry to find out where you’re doing well and where you should set improvement goals. Your accountant or industry association might be able to give you advice on accessing industry average figures.
Profit margins tell you how much room you have to manoeuvre on pricing and the level of sales you need to break even. As long as you have a positive gross margin, each sale will make some contribution to covering your overheads.
