THE BLOG
12/04/2014 04:03 pm ET Updated Feb 02, 2015

It's Not What You Make, It's What You Keep!

In my company, I'm fanatical about tracking our numbers and metrics on a monthly basis. Metrics show you the effectiveness of your actions, your successes for the month, and the overall health of your business on the whole.

There's one number in particular, however, that I feel measures the true pulse of a business, and it's a number surprisingly few small and medium size companies actually track: profit margin percentage.

First, let's take a step back for a moment and look at profit, or your total monthly income less expenses.

All businesses track this number. Profit is, after all, the life-blood of every business. With profit, you have the freedom and power to achieve the goals and purpose you set for your business. Without it, you're just struggling to pay the bills.

But your monthly profit only tells part of the story. To see the full picture, you must calculate your profit margin. Your profit margin tells you how successful you were at generating income from your business operations, and you can often tell the effectiveness of your decisions and the general health of your business by comparing your profit margins each month.

The calculation is simple: you divide your monthly net income, or profit, by the total income for the month. For example, a company that makes a $100,000 and nets $30,000 in profit has a 30% profit margin.

Without looking at profit margin, companies tend to focus only on top-line numbers. The more you make in sales in a month, the more successful you feel.

But are you growing your top-line and your bottom-line at the same rate? If not, if it's costing you too much to boost your top-line, your profit margin can plummet.

As the old saying goes, "More businesses die of indigestion then starvation." You need to keep enough of what you make.

Tweet out: Track your #profitmargin so you can focus on making it grow and avoiding the #revenuetrap. @TheCharfens @HuffPostBiz

That's why your profit margin is a vital number to track on a monthly basis. It shows you the health of your business, and it can key you into whether the decisions you make are having the desired effect.

If your profit margin shrinks one month, why did it shrink? Are you in a growth period where you are investing more than normal? Did you have a temporary expense, such as switching offices? These are expected, and you can know how much your activities are affecting your profitability.

On the other hand, if your profit margin shrinks and you're not expecting it, then you know something is wrong, and you can correct the problem before it gets worse.

If you're not tracking this number in your business, start today. I firmly believe that what you focus on--that which you consciously decide to give time and dedicated effort to--expands. By focusing on your profit margin, you will make decisions that ensure you keep more of every dollar your business makes.

Alex & Cadey Charfen are the Co-Founders of the Charfen Institute.