What is the profit margin? How to sustainably increase profitability

The most important points at a glance:

• The profit margin shows how efficiently a company converts its revenue into profit. It is central for controlling, pricing and tax strategy.
• Swiss SMEs must consider margins in the context of VAT, payroll-related costs and accounting under CO or Swiss GAAP FER.
• Service companies primarily optimise margins through utilisation, hourly rates and project management.
• Professional margin reporting (e.g. with a price/volume/mix bridge) creates transparency and enables action.
• Targeted measures can sustainably improve margins, for example through cost transparency, automation or pricing strategies.

What is meant by profit margin and why is it so important for companies?

The profit margin shows how much of the revenue generated remains as profit after deducting all costs. It is considered a key metric for assessing the economic efficiency and performance of a company.

The profit margin makes it possible to see at a glance how efficiently a company is operating. It establishes the relationship between revenue and expenses and shows whether the services provided are being offered at cost-covering and profitable prices.

It is therefore one of the most important foundations for decision-making in corporate management, controlling and financial planning.

In Switzerland, the profit margin also plays an important role in financial reporting under the Swiss Code of Obligations (CO) and in tax planning. A persistently low margin may indicate rising costs, inadequate pricing or structural inefficiencies.

A stable or growing margin, on the other hand, signals healthy cost management and strengthens the confidence of investors, banks and business partners.

What is the difference between contribution margin and profit margin?

The contribution margin and profit margin are among the most important metrics in financial analysis, but are often confused in practice. Both show how profitable a company is – but from different perspectives.

The contribution margin measures how much of the revenue remains after deducting the variable costs. This amount is used to cover the fixed costs and then generate profit. It is expressed in absolute figures (CHF) and shows how much each product or project actually contributes to covering overheads.

The profit margin, on the other hand, sets profit in relation to revenue. It is stated in percent and indicates the profitability of a service or a company. This makes it particularly suitable for comparisons across products, business units or periods.

Example:
A company achieves a contribution margin of CHF 200 on a product with revenue of CHF 1,000.

• Contribution margin = CHF 200
• Profit margin = CHF 200 ÷ CHF 1,000 =20%
   

Practical relevance:

• The contribution margin helps with short-term decisions (e.g. price floors, project evaluation).
• The profit margin shows the long-term earning power and efficiency of the overall company.

What types of profit margins are there and how do they differ?

The profit margin is not a single value, but encompasses different levels of corporate profitability. Depending on how it is calculated, it shows how efficiently a company operates at different levels – from production and operations through to the annual result after tax.

In practice, three types of margins are mainly used: gross margin, operating margin (EBIT or EBITDA) and net margin. Each of these metrics highlights a different part of the value chain and serves its own analytical purpose.

The most important profit margins at a glance

The gross margin provides information on how well a company has its production or purchasing costs under control. It is particularly suitable for trading and manufacturing companies.

The EBIT and EBITDA margins are crucial for operational management. They show whether the core business is sustainably profitable – regardless of financing and tax situation.

The net margin, finally, represents the end result. It is often used as a basis for valuations, tax planning or industry comparisons.

“Anyone who understands the different types of margins can take targeted action where value creation is being lost in the company.” - Dario Cardone

How is the profit margin calculated and interpreted?

The calculation of the profit margin follows a simple principle: profit is set in relation to revenue. What is decisive is which level of costs is included in the calculation. This is how the different types of margins can be distinguished in practice and analysed in a targeted manner.

To calculate the margin correctly, all costs and income should be recorded on an accrual basis. Especially for Swiss companies with seasonal fluctuations or project business, clean cut-off is essential to avoid distortions in the margin.

Formulas for calculating the most important margins

For interpretation, it is important not only to look at the absolute value, but also at its development over time. A rising margin usually indicates more efficient processes or successful pricing strategies, while a falling margin may indicate rising costs or price pressure.

In controlling, the margin is often broken down by products, customers or regions. This makes it possible to identify unprofitable areas and derive targeted measures. For service companies in particular, it is worth considering project and customer margins separately.

What legal and accounting frameworks apply in Switzerland?

The profit margin is not only a business management metric, but is also closely linked to the legal requirements of financial reporting. In Switzerland, the Swiss Code of Obligations (CO) and – for larger companies – Swiss GAAP FER or IFRS form the framework for determining and presenting the margin.

Correct posting of income and expenses is crucial to ensure that margin metrics remain meaningful. This also includes clearly recognising income according to the time of performance and appropriately recording provisions, depreciation and one-off expenses.

What role does the Swiss Code of Obligations (CO) play in margin calculation?

The Swiss Code of Obligations defines the principles of proper accounting in Articles 958 et seq. Companies must prepare their income statement in such a way that it provides a reliable picture of their financial situation. For margin calculation, this means that revenue, material costs and operating costs must be clearly distinguished and recorded on an accrual basis.

While the CO allows some flexibility in presentation, Swiss GAAP FER and IFRS are more detailed. They require a more precise breakdown of the income statement and transparent disclosure of depreciation, financial income and tax. This allows EBIT and EBITDA margins to be compared more accurately – particularly for companies with international connections.

How does value-added tax (VAT) affect margin calculation?

Value-added tax (VAT) can significantly change the interpretation of margin values if a clear distinction is not made between gross and net prices. Companies should always calculate margins on a net basis, i.e. excluding VAT. Only then can the true economic viability of a business model be assessed.

Particular care is required with mixed rates – such as reduced VAT rates in the food sector or in export business. Input tax deductions affect the actual cost base, which can have a direct impact on the gross margin.

How can service and project-based companies actively manage their margins?

For service and project-based companies, the margin is mainly influenced by productivity, utilisation and the quality of project planning. Since personnel expenses represent the largest cost block, even small fluctuations in utilisation or hourly rates can have a significant impact on the operating margin.

Effective margin management begins with transparency: only those who record their capacity, hours and costs accurately can optimise in a targeted manner. This includes structured processes for planning, performance records and post-calculation.

What role does utilisation play in this?

Utilisation shows how much of the available working time is actually billed. It is the key lever for a stable margin. A company with 80 percent utilisation achieves significantly better results at the same fixed costs than a company with 60 percent.

Key factors influencing utilisation:

• realistic project planning and prioritisation
• early identification of idle time
• clear responsibilities for resource deployment
• regular target/actual comparisons in controlling

Persistently low utilisation can indicate overcapacity or inefficient structures. Short-term bottlenecks can often be absorbed through temporary assignments, outsourcing or more flexible working time models.

How do you optimise hourly rates and project calculations?

A realistic hourly rate reflects all costs associated with service delivery. These include:

• Salaries and social security contributions (AHV, IV, EO, ALV, BVG, UVG)
• Holidays and public holidays, training, sick days
• Overheads such as IT, rent, administration
• Profit mark-up to secure the target margin

Taking these factors into account prevents projects from appearing “cost-covering” while in reality generating losses. In addition, each project should be subject to ongoing post-calculation. Deviations from the original budget – for example due to additional work or changed customer requirements – must be identified early and renegotiated contractually.

Best practices for project-based margin management:

• regular review of calculation fundamentals
• transparent communication with clients in the event of changes in scope
• reporting on contribution margins by project, client or team

“Consistent post-calculation is not a sign of mistrust in the project manager, but an insurance policy for the margin.”

How can the profit margin be sustainably improved?

Sustainable improvement in profit margin rarely comes from individual measures. It results from the interplay of pricing strategy, cost discipline, process quality and data-driven management. It is crucial that companies do not see margins as a static result, but as a dynamic control factor that is regularly reviewed and adjusted.

Long-term margin improvement begins with analysis: which cost blocks are growing disproportionately? Which products or services contribute above average to the result? And where are there untapped potentials in pricing, productivity or automation?

Which operational levers have a direct impact on the margin?

The most important factors influencing the operating margin can be divided into four groups:

1. Cost management

• Review of fixed and variable costs for economic efficiency
• Optimisation of purchasing conditions and supplier contracts
• Reduction of idle time, duplicate processes and media breaks

2. Pricing

• regular adjustment of prices to cost and market changes
• use of value pricing instead of purely cost-based calculation
• targeted use of discounts and payment terms

3. Product and service mix

• focus on high-margin offerings
• elimination of low-profit services
• expansion of high value-added additional services

4. Automation and digitalisation

• use of digital tools to reduce costs in accounting, reporting or payroll
• use of data for real-time margin monitoring
• integration of solutions such as Analise Franci for ongoing target/actual analyses

What role does margin reporting play in a company?

Professional margin reporting creates transparency and enables well-founded decisions. It shows not only how high the margin is, but also why it has changed.

Good reporting includes:

• regular analyses by product, client or region
• graphical presentation of trends and deviations
• a price/volume/mix analysis that separates price, volume and cost factors
• clear responsibilities for follow-up and measures

Modern reporting tools such as Analise Franci support companies in automatically monitoring margin developments and immediately highlighting deviations. This makes it possible to initiate measures such as price adjustments or cost reductions in good time.

How do margins differ between industries and company sizes in Switzerland?

The level of profit margin depends heavily on the industry, capital intensity and company size. Trading and manufacturing companies tend to work with lower margins, while service and consulting companies achieve significantly higher values. Competitive pressure, market position and regional cost structure also influence profitability.

The figures serve as guidelines and can vary depending on company size, business model and accounting standards (CO, Swiss GAAP FER, IFRS).

Smaller companies (SMEs) achieve lower margins on average than large enterprises, as fixed costs such as administration or infrastructure carry more weight. At the same time, they often have less room for negotiation with suppliers or landlords.

Regular margin analysis in an industry comparison helps to realistically assess one’s own position in the market. It shows whether a company is working more efficiently than average or whether there is potential for optimisation – for example through better purchasing conditions, digitalisation or targeted price adjustments.

What mistakes are frequently made when calculating or interpreting margins?

Errors in margin calculation are common and cause companies to misjudge their actual profitability. Often the problem lies less in the formula than in practical implementation – for example in the allocation of costs, the treatment of VAT or the cut-off of non-recurring expenses.

Common sources of error in practice:

• Confusing margin and mark-up: many mistakenly calculate the mark-up instead of the margin. While the mark-up sets profit in relation to costs, the margin sets profit in relation to revenue.
• Incomplete cost recording: overheads, payroll-related costs or depreciation are sometimes not taken into account. This leads to overly optimistic margin figures.
• Gross instead of net: including value-added tax (VAT) in revenue or cost figures distorts the result. Margins should always be calculated on a net basis.
• One-off effects and special costs: unusual income or extraordinary expenses do not belong in the operating margin calculation, as they distort the picture.
• Lack of accruals: if income and costs are posted in different periods, the margin for a given month or quarter may appear incorrect.

To avoid these errors, a clear internal guideline for margin determination is recommended. This should define which types of costs are included, which periodic accruals apply and how extraordinary effects are treated.

Best practices for quality assurance:

• standardised calculation logic in financial accounting
• automated data preparation with controlling tools
• regular plausibility checks between margin, contribution margin and EBIT
• training managers in correct margin understanding

A well-thought-out understanding of margins not only creates accuracy in accounting, but also clarity in corporate management. Those who regularly review their margins and analyse causes rather than symptoms gain security in planning and flexibility in decision-making.

This turns the profit margin from a mere metric into a management tool and a reliable yardstick for a company’s financial health.