Margin Calculator
All good businesses need to know their margins
There are a number of margins you need to know how to calculate to ensure your business is sound. The margin calculator can help you do so.
Using the Margin Calculator will assist you in analyzing the profitability of your business and it will enable you to evaluate how effectively it makes profit from turnover.
Gross Margin
Gross margin is a measure of the overall profitability of a business. If you have revenue that exceeds your costs then you are operating with a profitable gross margin. The acronym COGS is used for the cost of goods sold. If your sales or revenue exceed COGS the you have a profitable gross margin.
To calculate it, divide your gross profit by your sales revenue.
To calculate your gross profit, deduct COGS from your sales revenue.
The equation is therefore as follows:
gross ~margin = \cfrac{(revenue - COGS)}{revenue}Example. Let’s say you make $20000 revenue and have $15000 COGS.
GM = (20000 - 15000) / 20000
GM = 5000 / 20000 = 0.25 = 25\%
gross ~margin = 25\%
Sales Margin
Sales Margin (SM) is different from Gross Margin in that it relates to the margin on a particular item or section of a business. It shows the profitability before costs are deducted.
Calculate SM with the following formula.
SM = \cfrac{(selling ~price - costs)}{selling ~price}Example: an item sells for $100 but the COGS (costs of making it, selling it, etc) come to $92
SM = (100 - 92) / 100
SM = 8/100 = 0.08 = 8\%
SM = 8\%
Sales Margin is really important as it enables you to price items appropriate to their costs. If 8% sales margin is too small to make a good living, you at least now know you have to try to either cut COGS or increase the sales price to improve your sales margin.
Mark-up Margins
These are really helpful calculations to make for items. To calculate the mark-up you divide the profit figure by the cost figure. Mark-up is the difference between the selling price of an item and its cost.
Example. You sell an item for $100 that has costs of $92. Your profit is $8 and your sales margin is 8%
However, to get your mark-up you need to divide profit figure by the costs figure.
MU = profit / costs
In this example, we have 8 / 92 = 0.086.
Your mark-up is therefore 8.6%. If you want to increase profitability you therefore need to improve your MU value too.
Use the calculator to experiment with different values to see how it might benefit your business. Knowing your costs is of course essential. The calculator will helo you set prices based on the Mark-Up and Sales Margins you need to have.
Net Profit Margin
Net profit margin (NPM) is used to calculate the percentage of sales revenue that remains as true profit, after all COGS and associated expenses are deducted. It acts as a measure for the amount of net income (or net profit) a business makes per unit of currency of revenue earned. To calculate your NPM, first of all calculate your total revenue. Then deduct from it your total expenses. This will give you the net income figure (or net profit figure.) Then divide that figure by your total sales revenue. The formula is:
NPM = \cfrac{(total ~revenue-total ~expenses)}{total ~sales}NPM = (525000 - 400000) / 400000 \\= 0.31 = 31\%
This means that for every $ of revenue, the business made $0.31 in profit. Use the Margin Calculator to determine what sort of NPM you could get for your business under various costs and revenue scenarios.
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.
It is a more comprehensive approach than merely calculating gross profit margin, as OPM or EBIT takes into account all the operating costs and expenses your business may have. It is widely used in market analysis of a company as it enables a better comparative assessment of related companies. A company may have a strong Net Profit Margin, for example, but if it turns out similar companies have better OPMs then market analysts or managers in that company can see that their profits are perhaps not as impressive as they first seemed. Calculating operating profit helps improve efficiency and keep your business sharp.
It is calculated by taking your revenue and deduct your expenses and then divide it by your revenue.
So the formula is:
OPM = \cfrac{(revenue - costs )}{revenue}Example: a business had revenue of 190,000 and costs of 160,000.
OPM = (190000 - 160000) / 190000 \\= 0.16 = 16\%
The Operating Profit Margin of this business is therefore 16%
Calculations Lead to Strategies
Use the Margin Calculators to really help you strategize for maximum growth. Use them also to help you work out the viability of a particular business and its likely profitability.