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By using the margin calculators, you can get a gauge of the profitability of a business and, specifically, how well it turns its revenue into profit. Let's go through gross margin, sales margin, net profit margin and operating profit margin in turn.
How to calculate your profit margin
Gross margin is commonly used to measure the profitibility of a company's products. The figure demonstrates the percentage of revenue over and above the costs involved in making the product (COGS - cost of goods sold). COGS includes materials and labour involved directly in production.
Gross margin formula:
Gross margin = (revenue - COGS) ÷ revenue
Example of gross margin calculation
Your company brings in $50,000 in sales revenue and your costs of goods sold is $30,000.
Gross margin = (50000 - 30000) ÷ 50000 = 0.4 = 40%
How to calculate sales margin
The sales margin measures how much money you retain on the sale of an item or service after direct costs are deducted. It shows your level of profitability before operating expenses are deducted.
The sales margin of a product or service can be calculated by taking the selling price, deducting the expenses it took to make the product and then dividing it by the selling price. Expenses can commonly include materials, manufacturing costs, salaries, rents, discounts, etc.
Sales margin formula:
Sales margin = (selling price - costs) ÷ selling price
Example of sales margin calculation
You sell a product for $60 and your costs to make the product are $40.
Sales margin = (60 - 40) ÷ 60 = 0.33 = 33%
Markup is the difference between the selling price of an item and its cost. It is calculated by dividing the profit figure by the cost figure and is represented as a percentage.
Calculating selling price
Using our calculator you can work out the selling price for your products, based upon the cost of materials and percentage of profit as a markup that you are looking for. The profit margin formula will then calculate a selling price for you.
How to calculate net profit margin
Net profit margin is used to calculate the percentage of sales revenue that remains as true profit, after all costs and expenses are accounted for. It acts as a measure for the amount of net income (or net profit) a business makes per dollar or pound of revenue earned.
To calculate your net profit margin, take your total revenue figure (all types of income) and deduct your total expenses (tax, labour, materials, advertising, debt repayments, etc) to get your net income (or net profit) figure. Then, you divide that figure by your total sales revenue. For a more in-depth explanation of this, see our article profit margin formula - explained.
Net profit margin formula:
Net profit margin = (total revenue - total expenses) ÷ total sales
Example of net profit margin calculation
Your business took $400,000 in sales revenue last year, plus $40,000 from an investment. You had total expenses of $300,000.
Net profit margin = (440000 - 300000) ÷ 400000 = 0.35 = 35%.
This means that for every $1 of revenue, the business makes $0.35 in net profit.
The website Investopedia has a great article about how to determine what your ideal profit margin should be.
How to calculate operating profit margin
Operating profit margin, also known as return on sales or EBIT margin, is commonly used as a measure of the amount of profit a business makes on a dollar or pound of sales, after costs of production (wages and materials), but before interest and tax.
The difference between gross profit margin and operating profit margin is that the gross profit margin includes direct production costs only (materials, labour involved directly in production), where-as operating profit margin takes into account for all operating expenses (labour, rent, office supplies, utilities, advertising, travel costs, insurance and taxes, etc).
Operating profit margin formula:
Operating profit margin = operating income ÷ revenue
Example of operation profit margin calculation
Your business took $600,000 in sales revenue last year and had operating expenses of $500,000.
Operating profit margin = (600000 - 500000) ÷ 600000 = 0.17 = 17%.
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