Profitability Ratios

What is a profitability ratio?

A simple profitability ratio definition is a metric that shows you how much revenue exceeds expenses. There are a variety of profitability ratios and different ones are useful for different measures of your agency’s profitability. In this blog, we’ll define the different profitability ratio types and explain how to calculate profitability ratio, giving the formula for each one, with examples.

What are the different types of profitability ratios?

There are two types of profitability ratio:

• • Margin ratios
  • Return ratios

Margin Ratios

Margin ratios tell you how well a business is converting revenue into profit and how efficient its sales process is.

• Gross Profit Margin:

         The total amount of profit generated by a project can be calculated using the following formula:

Gross Profit / Revenue x 100 = Gross Profit Margin

Example: A company is looking to run a website-building project. It costs them $4000 to produce the website and the revenue will be $10000. Their gross profit will therefore be $6000. To calculate this as a percentage, i.e the gross profit margin, they use the following formula:

$6000/$10000 ⁢⁢⁢x 100 = 60%

• Net Profit Margin: This calculates the profit margin remaining after all company costs are subtracted from the equation.

Going back to the example above, if building the website involves operating costs that amount to $500, the profitability ratio formula for the net profit margin would be as follows:

    Let’s plug the numbers in:

So the net profit margin is 55%.

• Operating Profit Margins (or EBIT - Earning Before Interest and Tax): This is a calculation of how much a business earns from its operations before interest and tax.

The formula for operating profitability ratio is:

• Cash Flow Margins: This shows you how well a business is converting sales into cash. It’s important to have a good cash flow because this helps you pay expenses on time and avoid unnecessary interest expenses

       The formula for cash flow margins is: 

Return Ratios

Return ratios measure how efficiently a business converts funds invested into a business into profits.

These are some of the most useful return ratios to know:

• Return on Equity: This measures how efficiently a business is using shareholder's money. This metric is commonly used as a comparison tool between different businesses in the same industry. When companies are looking to invest in a certain business, one of the things they’ll look out for is its return on equity - how much money they’ll make on their investment.

       Return on equity can be calculated using the following formula:

• Return on Assets: This shows the net earnings of a company relative to total assets. It tells you whether a company makes enough profit to justify the total capital being poured into the business.

       It can be measured as follows:

What is a good profitability ratio?

In general, the higher the percentage, the better. However, every type of profitability ratio varies. For example, a good operating margin ratio is 1.5%, plus, whilst a good net margin ratio is 5%, and 10% would be considered excellent. Furthermore, a profitability ratio might be good for one type of business and not for another. For example, according to Indeed, a good net profitability ratio for the retail or food industry would be between 0.5% and 3.5% (as these industries have high overhead costs), while other industries should aim between 10-20%.

How can Workamajig help you run more profitable projects? 

As the only project management software designed for creative teams, Workamajig is unique in its ability to increase your project profitability.

Here’s how:

Time tracking tools:

Everyone wins with integrated marketing task management & time-tracking tools built just for creative teams. 

• Profitable, on-schedule projects
• Productive, focused creatives

Our Today dashboard lets creatives know exactly what's due, how much time has been allocated, and if there are any updates or schedule conflicts.

• With tasks, time tracking, files, conversations, & schedules all in one place, work is smooth
• Capture more billable hours and improve your bottom line with better time-tracking
• Easily log time from task cards with time entries or timers
• Keep projects on schedule with automatic schedule & budget updates based on tracked time

Free your creatives from bouncing between tools so they can focus on what matters - the creative.

Resourcing capabilities:

Knowing exactly what's needed today - or in the future - makes your resource planning simple and effective.

• It's easy to see what's needed & just as easy to assign work in just a few clicks from the project schedule.
• Get ahead of the game with our ready-to-go templates - or customize your own - that include typical resources needed for each project type.
• Everything you need is at your fingertips. View workloads by week or day for the whole team, & filter by office, department, role, service, or person.
• Plan proactively, not reactively. View real-life utilization, including meetings, vacations, company holidays & job commitments.
  
  

Get the updates you need, in real-time

• Get the bigger picture with less manual work. Easily view, filter, sort, & group all tasks - current, future, assigned, or unassigned

• Resourcing that stays connected to related projects lets you make quick changes & get instant recalculations

• Color-coded views factor in vacations, company holidays, and overbooked schedules to show you exactly where you need to focus

Finance and accounting:

Workamajig is the nerve center of your agency's financial health & performance, with key reports at your fingertips.

A full accounting package keeps you on track & gives you the business insight you need to grow a profitable agency.

• Easily see which clients are your most profitable & where you can improve your margins with flexible financial reports
• Efficient invoicing & integrated billing features are the keys to a healthy cash flow
• Budgeting & chargebacks establish clear timelines & transparent costs

Get all the standard corporate P&L statements you'd expect, plus additional client - and project - P&Ls ready to go. And a full suite of standard and custom report options. 

• Easily allocate overhead by hours, labor costs, or total bill to see true client profitability
• Find your profitable services with the strongest margins & double down on them
• Spot superstar account managers & your best (& most profitable) performers
  
  

Billing, streamlined:

Efficient invoicing is the key to healthy cash flow and Workamajig makes it a snap. 

Generate invoices automatically with details like time, materials, specific rates, and markups.

• Flexible billing options let you see work ready to be billed by time & materials, fixed fee, retainer, or media

• Drill down by project to see time entries for billable work and then review, adjust, transfer, or write off

• Prevent overstated revenue with advanced billings that are automatically deferred

• Use our Avalara integration to automate your sales & use tax collection - and even returns filing. 

Get Workamajig and watch your profits soar!