There are many metrics property management companies can use to pinpoint the value of their business, increase the profitability of their service, and decrease costs to their operation. Leveraging software that facilitate these measurements or regularly run property management reports allow organizations to actively improve or maintain profitability and increase cashflow to continue to grow their business. Collecting and analyzing data are key element of planning so businesses can stay financially healthy. If you operate a property management company and intend on growing, here are some strategies to effectively measure your profitability.
Margin ratios also known as profitability ratios are an effective way to determine whether your business is profitable. The margin ratio is a percentage calculated by dividing net incomes by net sales. The margin ratio gives determines how a business’s profitability is changing as they implement new products, services, and marketing campaigns. Typically, this is measured in quarters so businesses can monitor their progress then adjust their strategy for the following fiscal year.
Gross Profit vs Net Profit Margin
Both gross and net profit margin ratios are used to assess the financial stability of a business by calculating how much they earn for ever dollar in sales. Net profit margins offer a more clear and definitive representation of profitability than gross profit margins because net profit margins take all expenses into account unlike gross profitability margins.
Operating Profit Margin
The operating profit margin is a ratio or percentage that tells a company how much they’ve earned this year which can be easily compared to previous years or used to project their return in upcoming years. This metric is derived from the gross profit, it’s calculated by dividing the operating profit by the total revenue. The operating profit is the total value in sales minus the operating and overhead costs.
Break Even Point
The break-even point is essential to planning and strategizing. It’s the point when a company’s revenue is equal to its total costs. Knowing your break-even point per service or product offered allows property management companies to determine when they will begin to be profitable. To determine the break-even point, you must divide fixed costs by the sales price per unit minus variable costs per unit – fixed costs ÷ (sales price-variable costs). Once your break-even point is calculated you can adjust your sales price to help improve or speed up profitability.
The profitability index also goes by the Value Investment Ratio (VIR) or sometimes the Profit Investment Ration. It’s used to compare the present value of future cashflow against the initial investment. The value of future cashflow is an estimated value of cashflow expected to derive in the future. This metric is often used to convey the value of products and services to potential or current investors as well as rank the expected value of projects. Property management companies looking to invest in new service arms like maintenance or acquire new properties can use this to gage the value over time compared to the initial price of the acquisition.