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Tips for making your operating profit margins higher

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What is an operating profit margin?
The operating margin is the measurement of a company's revenue that is left over after paying for costs of production and operation. These costs can include the wages paid to employees, the cost of materials, advertising costs, and so forth.

The operating profit margin is a ratio used to determine this number and can be calculated as: operating margin= operating income/net sales.

A higher profit margin is necessary for companies because it allows them to be able to pay for their fixes costs, like interest on the debt they have incurred. In addition, a higher operating profit margin is generally indicative of a company that is enjoying greater financial stability.

Companies should strive for higher operating profit margins, although this is not always easily done. A company that is considered to have a high operating profit ratio has one of over 30 percent on average, although it varies from industry to industry.

Higher operating profit margins come as a result of fewer operating expenses. For example, let's take two construction companies, one that owns all of its equipment and one that rents it all. The company that owns all of its own equipment, instead of leasing or renting it, will most likely have a higher profit margin, since they have fewer operating expenses. The company that rents its equipment and machinery has a lower operating profit margin because it is spending money on the equipment.

However, operating margin isn't always an indication of the quality of a company. This can better be determined by looking at the change in operating margin over a figure of time. A good indication of a company's quality is a steady increase in the margin, which means it is earning more per dollar of sales.

Tips for making your operating profit margins higher
So how can you increase your operating profit margins? The following are some tips to increase your operating profit margins:

  • Own instead of rent or lease. Where possible, you should try and own your equipment if you are looking to increase your operating profit margin. This will decrease your overall monthly expenses, since you are not paying a fixed amount each month on your computers, machines, and so forth.
  • Cut down on unnecessary expenses. Examine your outgoing expenses each month and work to cut down on unnecessary ones. Some of the companies with the highest operating profit operations are those that offer no frills. Airlines are a good example of this - airlines who don't offer meals, snacks, or other frills tend to have higher operating profit margins than those who do.
  • Downsize. No one likes to downsize, but wages play a big part in a company's operating expenses. You can make your operating profit margins higher by eliminating employees you don't need, or reducing the number of hours worked.
  • Increase sales. An increase in your sales, on incoming money, can also increase your operating profit margin. Increasing sales should be a goal every company strives for.

There are a number of ways you can make your operating profit margin higher; however, it is important to take all things into consideration before cutting costs in certain areas. If you begin denying your customers little perks and luxuries they are used to, you could end up losing their business entirely, which will have a negative effect on your operating profit margin.

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