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Profit Margin is one of the core business aspects and a key indicator of financial sector of any business as it suggests how smoothly a business is able to operate and make profits from its operations.
What is meant by Profit Margin?
It is a financial indicative used to calculate the productivity of a business by comparing its net profit to the revenue generated.
What does profit margin indicates?
Profit Margin basically shows how much profit a business has made after deducting all the expenses from its total generated revenue.
How to calculate profit margin percentage?
Profit Margin can be calculated using the following equation.
Profit Margin = (Net Profit / Revenue) * 100
Here in this formula:
Revenue indicates the total amount of money that a business has made after the sales of either services or goods.
Whereas,
Net Profit means the amount of money left after deducting all of the business expenses like cost of material, operating costs, taxes and interests from the revenue made.
What are the different types of Profit Margin?
Profit Margin has some basic variations with each type focusing on different financial sectors of business. Its’ main types are:
Gross Profit Margin:
Gross Profit is when you minus cost of goods sold out of total revenue. Its’ purpose is to measure the profitability of a business’s primary activities by matching gross profit and revenue.
Formula to calculate gross profit is:
Gross Profit Margin = (Gross Profit / Revenue) * 100
Examples of Gross Profit Margin:
If a business has made 40 % gross profit margin, that means against every dollar made in revenue, the business gets to keep 40 cents after subtracting the cost incurred on sold products.
Operating Profit Margin:
How to explain operating profit margin?
It is the gross profit minus all operating expenses of business. It is to determine the profitability of business operations by equating revenue and operating profits.
How do you calculate operating profit margin?
You can calculate operating profit margin using this formula:
Operating Profit Margin = (Operating Profit / Revenue) * 100
Net Profit Margin:
Net Profit Margin gives a complete, wide spread view of overall profitability of a business by comparing net profit to revenue.
Formula to calculate net profit is:
Net Profit Margin = (Net Profit / Revenue) * 100
Examples of Net Profit Margin:
If a business claims to have made 20 % net profit margin, it indicates that the business has made profit of 20 cents against every dollar of revenue generated post deduction of all expenses.
Why it is important to understand and monitor profit margin of businesses regularly?
It is very important for business owners to regularly keep a tab and seek improvement on their profit margins to ensure that they are able to run their business successfully and sustainably and business is making growth as well.
