A businessman calculating expenses at tax timeWhether you are new to the industry, or have been around for quite a while, you’ll want to target the ideal range of profit margins for your business. There are many different factors that go into targeting an appropriate profit margin. The first thing you need to do is understand the formula in calculating yout company’s profit margin.

To calculate the profit margin of your business, use the following formula:

  • Determine Your Business’ Revenue
  • Add Up All of Your Business’ Expenses
  • Subtract All Expenses from Revenue (Equals Gross Profit)
  • Divide Total Revenue by Gross Profit (Equals Profit Margins)

Obviously, the higher your profit margin, the more profitable your business is. But how can you go about determining the correct target?

Determining your target profit margin

One of the quickest ways to determine this is to check with others and see what margins they can come up with. However, this is not always the most accurate way, as there are many different factors in determining a companies profit margins.

Your profit margins will rely on a number of different things:

  1. Cost of Cabinets: By buying directly from the manufacturer you cut out the middle man so that you can offer your customers a better product at a lower price. However, depending on the manufacturer(s) you deal with, the costs of cabinets will vary. Usually, the profit margin on kitchen cabinets for dealers lies somewhere in between the 25-50% range. Most of the time, the less expensive the cabinet, the higher the margins. Some manufacturers make it mandatory that you spend a minimum amount per year on orders so make sure to take this into account.
  2. Cost of Business Operation: The cost of your operation falls under expenses. This includes the rent of your building, the cost to hire employees, the cost of marketing strategies and many other things as well. As you make more sales as a cabinet dealer, you will more than likely gain more clients, and therefore have to increase the costs of operation.
  3. Your Customers: What customers are you appealing to? Do you offer good value stock cabinets at a low price? Do you deal with custom cabinet manufacturers and make high end sales? Or, do you offer a variety of cabinets to meet the needs of a broader customer base? And what about construction? Do you mostly sell your cabinets for remodeling jobs? Or, are you a cabinet dealer that deals with new construction jobs?  These are all important questions to answer definitively for your market – and for you target profit margins.
  4. Sales Volume: Finally, and most simply, how much are you selling? Obviously, the amount of cabinets you sell will play a big role in determining the profit margin you should be targeting.

In the end, targeting the ideal profit margins for your business will depend on a number of things. However, to conduct business more efficiently, and to have more success, you should take time to define your ideal target profit margins first.