Companies in distribution generally have profit margins between 1% and 4% (.01-.04). Their low profit margins are compensated for by high inventory turnover and large volumes. That is, they may not make much on each sale, but they make a lot of sales. Nevertheless, profit margins vary considerably among different segments of the distribution industry.
Although your profit margin is above the norm for distribution in general, a thorough analysis includes comparing your company to other companies in your specific industry (your accountant or financial advisor can help you find this data) and looking at your profit margin over several years.
Who's Watching:
See the Definition for a discussion of other parties that are interested in your profit margin.
Actions:
You should review all of the factors which might have affected your company's profit margin. Such factors might include: (1) intensive competition in the industry, which limits your ability to raise prices; (2) inefficient operations due to underutilization of plant, obsolete equipment, or poor management; (3) high product costs; (4) low sales levels relative to your company's breakeven point; (5) high fixed costs, either because of heavy depreciation charges or high interest payments, or both; (6) industry-wide recession; (7) high compensation paid to principals or owners; (8) high labor turnover; or similar factors.
