Monitoring the Health of Your Small Business: Operating Margin

Understanding your operating margin is essential for keeping your small business financially healthy. The operating margin shows how much of your revenue is left after covering all your operating costs.

It’s a key measure of how well your business is doing and how much profit you’re making.

In this article, we’ll explain what operating margin is, why it’s important, and how you can monitor and improve it to help your business succeed.

What Is Operating Margin?

Operating margin is the percentage of your revenue that’s left after you’ve paid for your cost of goods sold (COGS) and operating expenses. In simple terms, it’s your operating income divided by your total sales. Operating expenses include things like payroll, rent, insurance, and taxes. After paying these costs, what’s left is your operating income, which shows how much profit your business is making.

Why Is Operating Margin Important?

Operating income is what you use to pay off debts, pay yourself, and save for the future. A healthy operating margin means your business is making enough money to not only cover costs but also grow and prepare for challenges.

Here’s why it’s important to keep track of your operating margin:

Pay Debts and Yourself: Ensure you can pay off your debts and take home a paycheck.
Save for Growth: Put money aside for future investments or unexpected problems.
Measure Efficiency: See how well your business is managing its costs.

How to Monitor Your Operating Margin

There isn’t one perfect target for operating margin because different industries have different standards. For example, businesses that need a lot of equipment might have lower margins compared to service businesses like restaurants. The key is to know what’s typical for your industry and try to meet or exceed that.

Here’s how you can track and improve your operating margin:

Know Your Industry Standards: Learn what’s normal for your type of business.
Track Over Time: Regularly check your operating margin to see if it’s going up, staying the same, or going down.
Compare with Peers: Look at how your margins compare to similar businesses.

How to Improve Your Operating Margin

To improve your operating margin, you can either increase your revenue or lower your operating costs.
Often, it’s best to do both. Here’s what you can do:

Check Your Pricing: Make sure your prices are high enough to cover your costs and make a profit.
Cut Costs: Look closely at your expenses and see where you can save money.
Negotiate with Suppliers: Try to get better deals from vendors to lower your costs.

Why Operating Margin Matters to Lenders

When you need a loan or investment, lenders will look closely at your operating margin. A strong operating margin shows that your business is well-managed and making enough money to cover costs and pay back loans. Lenders want to see that your business is financially healthy and has the potential to grow.

From a lender’s point of view:

Check Financial Health: A good operating margin shows your business is in good shape.
Assess Risk: Lenders use this measure to decide how risky it is to lend to your business.
Predict Growth: A growing operating margin means your business is on the right path.

Conclusion: Keep Track of Your Operating Margin

Monitoring your operating margin is key to keeping your business healthy and profitable. By checking this number regularly, you can make sure your business is managing its costs well and making enough profit to grow. Whether you want to improve your margins or just keep them steady, understanding and tracking your operating margin is important for long-term success.