How to Calculate Profit Margin?
Launching their first business (whether it’s a restaurant or repairs shop), most beginning entrepreneurs have a vague idea of the basic financial terms and laws. However boring and difficult, mastering the fundamentals of economics is a must unless you want to see your company sink down within its first year in the market.
A profit margin is a key economic term that allows you to see the true state of your business affairs, detect your weak spots, analyze your options, and develop an effective strategy for growing and moving forward.
In this post, we’ll talk about what a profit margin is, what parameters it’s based on, and how it’s different from a markup. Plus, we’ll overview the main methods for calculating a profit margin by using online calculators and Microsoft Excel.
A profit margin marks the difference between the buying price and the selling price of an item. This is the formula commonly used to calculate this parameter:
Profit/Revenue × 100% = Profit margin
Let’s take an example. A 27% margin means that on each dollar of revenue, a company makes 27 cents of profit. The remaining 73% account for the company’s expenses. A margin indicates the success of your business, i.e. how good it is at transforming revenue into profit.
To assess the profitability of an enterprise, we need to go a little deeper and look at the gross profit margin. Don’t worry. There is nothing you can’t wrap your head around! This is how a gross profit margin is calculated:
(Revenue – Cost of goods sold)/Revenue = Gross profit margin
Cost of goods sold (COGS) include the expenses directly related to the manufacture of a unit of goods, including raw materials, cost of labor, overheads, etc. At the same time, debts, taxes, and operating expenses are not included into COGS.
By analyzing each of these parameters, you’ll be able to see how your company is doing, identify what expenses need optimizing, and take the steps towards improving the situation. Of course, all this requires time and mental work, but you can’t be lazy when your company’s financial safety is at stake.
Markup is another economic term we’d like to address in regard to this issue. As it turns out, few startupers understand the difference between the profit margin and the markup. Let’s put an end to all doubts!
Plainly speaking, a profit margin is a part of the earnings the company is left with after deducting all expenses. At the same time, a markup is an amount added to the total cost incurred by the manufacturer with the purpose of covering the costs of production, delivery, equipment maintenance, etc. Now let’s take a look at the formulae used for calculating each one of these indicators.
As you already know, to determine a profit margin, we need to divide the profit amount by the revenue amount: Profit/Revenue × 100% = Margin
Markup (in %) is calculated like this:
(Selling price – Production cost)/Production cost * 100 = Markup
Let’s take an example. Suppose, a company spent 60 dollars to manufacture a product. Then it sold it for 80 dollars. This way, the company’s profit is 20 dollars. The profit margin is: 20/80 * 100 = 25%
The markup percentage is: (80 – 60) / 60 * 100 = 33.33%
The modern technologies have automated almost every business process, sparing beginning entrepreneurs lots of time and effort. For example, you can easily calculate any economic parameter online, whether it’s a wholesale price, interest rate or return on investment. Along with saving your time, such online services provide precise results, minimizing the risk of error. Now you can assess your company’s financial performance without having to study economics and other disciplines!
We’re glad to present to you our top 5 free services for calculating a profit margin online. Luckily, the algorithms used by each of these tools are pretty standard.
Kalku is a clever, intuitive platform that allows you to determine your profit margin in one click. On top of that, you can calculate other crucial variables, such as VAT, sales tax, margin with a discount, and markup!
Amazingly easy-to-use, this tool enables you to calculate your net and gross margin in the nick of time. The service has taken good care of young entrepreneurs by providing the Definitions section. There you’ll find the detailed explanations for key financial indicators and their formulae.
This platform offers not one but several quick tools for calculating а markup, gross margin, profitability, price with and without VAT, discount, etc. Also, you can print out the obtained results right on the spot!
Enter your Cost Price and your Selling Price and click the Calculate button. This is how you find out your profit margin. Easy, right? Share the link to your results with your subscribers on Twitter and Facebook.
This comprehensive platform provides a head-spinning selection of financial calculators for amortization, inflation, lease, income, mortgage, and so on. It’s a one-stop website for checking your business health while sipping a cup of coffee.
What do you do if you don’t have the Internet connection at the moment and therefore can’t benefit from the amazing online services we’ve listed above? Luckily, you can also calculate your profit margin using the old but good Microsoft Excel. Simply create a new sheet and enter the right formulae! We’ve prepared a detailed guide on calculating a profit margin in Excel.
1.Create a new sheet in Microsoft Excel. Enter the following data: Column А – Cost of goods sold; Column B – Production costs; Column С – Revenue; Column D – Margin.
3. Calculate Revenue in column С. To do that, highlight С2 and enter =(A2-B2) into the formula line.
5. Now calculate Margin in column D. To do that, highlight D2 and enter =C2/A2*100 into the formula line. Press Enter. Done!
There is no denying that managing a business nowadays is much easier than it was 20 or even 10 years ago. At your disposal, there are hundreds of apps and other services for assessing your company’s performance as Logaster. In this post, we tried to showcase that determining your profit margin is not as daunting a task as it may seem. We hope to have made a good contribution to your confidence as an aspiring entrepreneur. We highly recommend that you continue to explore other handy tools designed for business owners like yourself!