If you’re finding how to calculate profit margin quickly and easily, look no more. You’ve landed the perfect place to learn effective ways to calculate profit margin.
But before we dive into it, why exactly is calculating profit margin so important?
The answer is simple. Whether you own a large-scale, corporate-controlled business or a small, privately-owned corporation, the parameters you need to monitor to ensure your business is thriving are pretty much the same. And one of these success-measuring factors includes ‘profit margin’.
As a start, let’s have a look at what profit margin is.
What is profit margin?
Simply put, profit margin is a measure of profit relative to the revenue generated. This comes in three methods: gross profit, net profit and operating profit.
The rule behind calculating these is simple. You have to find the value of the profit and express it as a percentage of the revenue. An effective expression of this is as follows.
Profit Margin = (Profit / Revenue) * 100
How To Calculate Profit Margin Ratio Easily
If you’re someone who just started their own business, you may find the terms quoted tricky.
But we’ve got your back. Firstly, we will delve into the meaning of each term. Then, we will individually assign formulas. Our aim is for you to have a good know-how of the basics by the time you reach the end of this blog.
How To Calculate Gross Profit Margin Using A Quick Formula
Simply put, a gross profit margin is a tool to analyze profitability. It omits only Cost Of Goods Sold (COGS) from the total revenue.
COGS involves the money invested in the production and sales of goods. For example, the price of raw material and the cost of labor.
This means you consider all the money generated from your business. The only omission is the cost to produce and sell goods.
Once you have this value, you will express it as a percentage of the total revenue. This is an effective method because it helps represent the percentage of profit per dollar of revenue.
To put the explanation into a concise formula;
Gross Profit Margin = (Revenue – Cost Of Goods Sold) * 100 / Revenue
Additionally, you may find it helpful to refer to our Mark Up Calculator. This will help you decide effective sales prices for your products.
What is Operating Profit Margin and How Can You Calculate It Easily?
Operating profit margin is a more detailed measure of profitability. This is because it represents the percentage profit per dollar after omitting expenses needed to run the business.
This gives a clearer picture of profitability. Wondering why? … Because you omit the money that is bound to ‘flow out’ of the business.
However, it must be noted that it does not omit taxes and debts. This is so because these are not classified under ‘operational expenses’. Hence, you must keep in mind that taxes and debts are still due.
The simplest way to find the operating profit margin is using by dividing the operating income by revenue and multiplying by 100. Expressing it as a formula:
Operating Profit Margin = (Operating Income * 100) / Total Revenue
In this formula, operating income refers to all earnings before taxes and interest are omitted. It only deducts parameters such as depreciation and wages.
Let’s Talk About Net Profit Margin – The Definition and Formula
As the name suggests, net profit margin gives a measure of the net income relative to the revenue. It basically represents how what percentage of each dollar of revenue forms the profit. In other words, it gives us the profit per dollar revenue.
This gives the most concise picture of actual profits because it not only omits COGS and operational expenses but also other non-operational expenses such as taxes, interest and one-time investments. This means you’re getting a picture of the profit that will be going into your pocket.
Net profit margin can be calculated by dividing the net income by revenue and multiplying by 100. The net income can be broken into the following parameters: COGS, operating expenses and non-operational expenses (such as taxes).
This can be demonstrated by the simple formula:
Net Profit Margin = Revenue – (COGS + Operating Expenses + Non-operation Expenses) * 100 / Revenue
How To Calculate Profit Margin Ratio
‘Ratio’ basically refers to the profit margin concerning the revenue, without converting it to a percentage. This can be done by dividing the values you obtained by 100. Alternatively, you can simply omit the x100 step while calculating in the first place, and you will have the profit margin ratio.
What Is A Good Profit Margin?
If you’re setting up your business, you may be wondering what target to set for your profit margin. Thus, to solve your query – profit margin is a highly flexible parameter and varies for different industries.
However, for a general idea, you can refer to the following table:
|Profit Margin Percentage||Status|
Profit margin is an essential metric used to determine the success of a business in terms of the profit yielded. It comes in three different forms. The first omits only COGS, the second omits COGS plus operating expenses and the third omits non-operational expenses in addition to the former two.
You can calculate this profit margin within seconds using our handy tool, the automatic Margin Calculator.
Alternatively, you can understand the back-end process of how to calculate profit margin quickly and easily from this blog and calculate it yourself using the formulas given above.