GlossaryHow to Calculate Profit Margin (with formula)

GLOSSARY

How to calculate profit margin (with formula)

If you need to calculate your business’ profit margins, we have an easy profit margin calculation formula you can follow. First, let’s define profit margins to understand the concept and why it’s important.

What is a profit margin?

Your profit margin is a key business metric that allows you to deduce the profitability of your business.

Your profit margin is the percentage of revenue you have left after deducting all the expenses you incurred in generating that revenue.

Calculating your profit margin is important for you to determine the financial health of your business, make informed decisions, and compare your performance against industry benchmarks.

So how do you calculate profit margins?

Firstly, you need to understand that there are two types of profit marginsgross profit margins and net profit margins.

Gross profit margin calculation

Your gross profit is the percentage of revenue that remains after you’ve deducted your cost of goods sold (COGS). It indicates how much profit your business is making on each sale, before taking your other expenses into account.

To calculate your gross profit margin, you need to subtract the COGS from your revenue and then divide the result by the revenue. The gross profit margin formula is as follows:

Gross profit margin = (Revenue – COGS) / Revenue x 100

How To Calculate Profit Margin

For example, if you generated $100,000 in revenue and incurred $60,000 in COGS, your gross profit margin would be:

($100,000 – $60,000) / $100,000 x 100 = 40%

This means that for every dollar of revenue, your business makes 40 cents of gross profit.

Net profit margin calculation

To calculate your net profit margin, you need to deduct all your expenses from the revenue and then divide the result by the revenue. The net profit margin formula is as follows:

Net profit margin = (Revenue – All expenses) / Revenue x 100

For example, if the same business has $20,000 in operating expenses, $5,000 in taxes, and $3,000 in interest, your net profit margin would be:

($100,000 – $60,000 – $20,000 – $5,000 – $3,000) / $100,000 x 100 = 12%

This means that for every dollar of revenue, your business makes 12 cents of net profit.

 

See relate terms
What is gross profit?
Gross profit vs net profit (comparison)
What is net profit?

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