By Ken Andrukow, TwoBrain Mentor A funny thing happens as your business grows…so do your costs, both fixed and variable. You sign a new team to a training contract and you need to invest in 10 new rowers. Your PT is growing every month, and you think it is a good time to increase square footage. This can become a slippery slope. To make the right choices at the right time, you need to ensure you understand your margins. Profit margin is a metric that helps to assess efficiency in running a business. While overall costs influence the net profit margin, variable costs are a specific determinant of gross profit margin. Variable costs are the cost of goods sold — for instance labor costs or material costs — and are different from fixed operating costs of running a business. By controlling variable costs you can achieve a higher gross profit margin and, therefore, in a more profitable business. As Mike Michalowicz writes in “Profit First”: “The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s profit is Sales – Expenses = Profit. It is simple, logical and clear. Unfortunately, it doesn’t give you the total picture. The formula, while logically accurate, does not account for human behavior. In the GAAP formula profit is a left over, a final consideration, something that is hopefully a nice surprise at the end of the year. Alas, the profit is rarely there and the business continues on its check to check survival. Sales – Expenses = Profit Sales – Profit = Expenses With Profit First you to flip your focus to Sales – Profit = Expenses. Logically the math is the same, but from the standpoint of the entrepreneur’s behaviour it is radically different. With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.” Understanding this accounting principle will help you ...
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