What Factors Affect a Profit Margin?
Factors affecting a company's profit margin include quantitative elements -- also known as metrics -- such as profit margin and net income. Qualitative elements -- including the way a company formulates its sales tactics, selects customers and makes pitches -- also affect the organization's profitability and market share over time.
Profit margin is the ratio of a company's profit after taxes to merchandise expense the business incurred during the period under review. This metric equals after-tax profit divided by cost of sales times 100. In a financial glossary, "cost of sales," "cost of goods sold" and "merchandise expense" mean the same thing. For example, an organization's income statement -- the one showing expenses, revenues and net income -- displays the following data: pretax profit, $1 million; applicable tax rate, 25 percent; and cost of sales, $3 million. Corporate taxes equal $250,000 ($1 million x 25 percent), so after-tax profit equals $750,000, or $1 million - $250,000. As a result, profit margin equals 25 percent, or $750,000 / $3 million x 100.
In profit margin calculation, quantitative factors include after-tax profit and merchandise cost. To calculate after-tax income, subtract total expenses -- including cost of sales -- from total revenues. Expenses run the gamut from litigation and rent to insurance, office supplies and machinery maintenance. Revenues come from elements such as selling goods, providing services or both. The higher a company's revenues, the higher its after-tax profit and profit margin -- assuming its cost structure remains the same during the period under review. "Total expenses" and "cost structure" are identical terms.
A company's leadership sets proper procedures to increase profit margins, expand market share and give department heads everything they need to be on equal footing with the fiercest competitors they're up against. For senior executives, the goal is to establish strategies that tell managers what to do in a good economy, how to navigate a bad one, how to cope with operational tedium and tactics to use to dodge peers' strategic bullets down the road. Qualitative elements include sales policies, marketing procedures, the tone at the top, salespeople's reward programs and personnel training.
Profit margin considerations -- and the quantitative factors that affect this metric -- make it into a statement of profit or loss, also known as a statement of income or an income report. Besides this accounting synopsis, a company must publish such performance data summaries as balance sheets, statements of cash flows and statements of changes in shareholders' equity. "Statement of financial position," "statement of financial condition" and "balance sheet" are identical terms.