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FM11 Exam 2

A low profit margin means a business is not efficiently converting revenue into profit. This can result from prices that are too low or costs that are too high. Low margins are determined relative to a company's industry and its own past performance. A company tracks gross, operating, and net margins to see where profits are lost at different stages. Low prices or high costs of goods sold and operating expenses can reduce margins. What is considered a "low" margin depends on the industry, as norms vary greatly. Without improvements, low margins may prevent a business from covering costs, investing in growth, and providing returns.

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52 views1 page

FM11 Exam 2

A low profit margin means a business is not efficiently converting revenue into profit. This can result from prices that are too low or costs that are too high. Low margins are determined relative to a company's industry and its own past performance. A company tracks gross, operating, and net margins to see where profits are lost at different stages. Low prices or high costs of goods sold and operating expenses can reduce margins. What is considered a "low" margin depends on the industry, as norms vary greatly. Without improvements, low margins may prevent a business from covering costs, investing in growth, and providing returns.

Uploaded by

Han O
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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A low profit margin means that your business isn't efficiently converting revenue into profit.

This
scenario could result from, prices that are too low, or excessively high costs of goods sold or operating
expenses. Low margins are determined relative to your industry and historical context within your
company.

Low Margin Factors

Companies track three different profit margins: gross margin, operating margin and net margin. At each
level of your company's income statement, you divided a particular profit level by revenue during the
period to determine margin. Gross margin, for instance, is gross profit divided by revenue.

Gross profit equals revenue minus COGS, or variable costs. A starting point for low margins is low price
points. If your business doesn't charge what goods are worth, you miss out on additional revenue
opportunities. Charging $9.99 for an item that cost you $6 offers limited gross margin relative to
charging $12.99 for that same item.

Expenses often are the component of margin that companies struggle to


control. High materials or inventory costs, shipping costs or packaging costs can lead
to excessive COGS. Building rental, utility fees and salaried labor are among the
potentially expensive operating expenses.

Low Margin Interpretation


Declaring margins "low" is relative. A 30 percent gross margin is very low in some
industries or sectors, but it is on par or even high in others. The technology sector had
an average gross margin of 49.06 percent as of April 2015, according to CSIMarket.
Therefore, a business with a gross margin of 35 percent is well below industry
standards. In contrast, a tech company with gross margin of 60 percent is much more
efficient. Industry norms vary based on cost structures and competition. A low margin
also is relative to your company's previous performance. In general, stable and rising
margins signal positive financial health for a business.

Negative Impacts
In some cases, low profit margins align with a company's efforts to aggressively grow
market share. You may sacrifice short-term profit to generate traffic. However, low
margins that aren't part of a strategy mean you aren't creating strong profit from your
business activities and revenue. Without margin improvements, your business
may struggle to keep up with debts and expenses, invest in expansion and
distribution income to owners.

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