(Note: this post was co-authored by my beloved husband, Kristian Carter.)

Here’s the deal…when discussing how much businesses make, there is a HUGE difference between how much profit they make and what their profit margin is.

 

However much a company makes (call it Widgets, Inc.) is called profit. This is just the total amount of money this company makes by selling widgets. Inventive naming, I know. πŸ˜‰

 

BUT, there is a column next to the “income” column that most businesspeople detest. It’s, in simplified form, “money we have to spend to operate this business.”Β  This column* contains all of the costs associated with that company: labor, raw materials, rent, utilities, etc. Yep, they have to pay money to make widgets!! You’d think this would be a no-brainer, but most people talk about profits, not profit margins.

 

(*Yes, yes, I know labor is its own column, but I’m trying to keep it simple! Stick with me, here!)

 

Let’s delve into Widgets, Inc. a little more. We find that they have made $3.4 million last year alone! They must be ROLLING IN THE DOUGH, right? Oops, not so fast.

 

They had to pay $4.1 million in costs!! Bummer. Many companies will have some money in reserve or can borrow money to carry them through a period of rough times. However, if business does not improve, the reserves will be depleted, and the company may become too risky for additional loans. Too bad Widgets, Inc. will likely be closing their doors. Their CEO gets no more paycheck (as well he or she shouldn’t…look at those numbers!), people will be fired, and no one gets to buy another widget from them. Sad.

 

If Widgets, Inc. were Apple, people would be ever so slightly ticked, no?

 

So, when discussing how well a business is doing (and for politicians, how much to tax them), think about what happens when the margin is negative. No way to tax a closed company (though, I’m sure they’ve wracked their teeny brains to find a way…).

 

Now, when people discuss the EVIL OIL COMPANIES and their OBSCENE PROFITS!…ask yourself this: what is the profit margin?

 

To get the answer, buy some stock in any company that has anything to do with the oil industry. You will be sad that you will never get rich. They are all almost always on the verge of making no profit margins.