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8.7 Operating Profit Margin Analysis

The Operating Profit Margin for a small business like Real Estate Funding Solutions is the operating income divided by the sales of the business. In the world small business the earnings before income and taxes is used as the operating income. This ratio computes how much money the business has left over to pay for the interest on its loans and taxes and it gives a small business owners like Ryan and David the ability to explain to the reader of the business plan just what kind of cushion the business has to pay its creditors.

In this analysis we can see that the operating margin is 13%, 12% and 9% of total sales which are projected to be $125k, $175k and $225k in the years 2012, 2013 and 2014 respectively. What this means in simple English is that of every dollar earned in 2012, 13 cents will towards the payment of interest and taxes and the remaining will be the net profit. These margins of course can be easily affected if costs were to increase resulting in higher operating expenses and therefore lowered operating profit ratios. Alternatively sales could come in higher than projected and that could improve these ratios if costs remained the same. Operating income is currently projected to be $16,543, $21,510 and $20,899 in the three coming years.

It is important to note that the operating profit margin is projected to reduce over the first three years because both the owners will begin taking larger salaries resulting in larger compensation costs which of course affect the operating income for the business. The thinking is that the first year is critical for the survival of a small business like Real Estate Funding Solutions, and both Ryan and David have decided to take a very modest salary for the first year to ensure that the business is able to build up a healthy cash balance to withstand tougher days in the event of a market slowdown.

Quick Links:

  1. Go to the Corresponding Template section for this industry.
  2. Go to the Corresponding Questionnaire section for this industry.

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