Profit margin is an indicator for measuring your business’s profitability. In order to measure your online business’s profitability, you need to consider your gross, operating and net profits as a percentage of your total revenue. In other words, a profit margin expresses the amount of money you’ll keep as earnings. With the right margin calculator you can easily find the results you need to guide you in making informed financial decisions.
Here is how using a margin calculator can help you determine your profitability.
Gross Profit Margin
You can calculate your profit margin based on your gross profit to determine your profit relative to the cost of production. Gross profit is revenue minus cost of goods sold. Therefore, gross profit covers the cost of production which includes labor and materials.
Calculating Profit Margin
The three profit margins you should calculate include gross, operating and net. You can calculate these margins by dividing the profit by the revenue and then multiplying the figure by 100 to get the percentage of your profit margin.
You need to calculate each margin using a different profit measure.
Assuming you already know your desired profit margin and the cost of your goods, a margin calculator will be your best friend. You can calculate variables of a sales process such as cost of goods, profit margin, revenue and profit.
Having higher margins indicates that your business is doing well and there is room for errors or manageable bad luck while low margins means any bad luck or changes could lead to disaster.
Sales tax, Markup and margin with VAT calculators are great tools for business owners. The margin calculator you choose to use will depend on the results you desire to get from your calculated margins.
You need the following details to calculate your margins:
- COGS (cost of goods sold)
- Gross profit which is Revenue less COGS
- Gross profit percentage which is Gross profit divided by Revenue multiplied by 100.
The gross margin formula is profit margin = (revenue – costs) /revenue*100.
If you don’t want to calculate your margin manually you can use a gross margin calculator. As you can see margin is a simple percentage calculation that is based on revenue.
Markup, which is percentage of profit vs. cost, is based on COGS.
Now that you have your margin, the formula for calculating revenue is Revenue = 100 * profit / margin.
Given your margin and revenue, you can also calculate the cost per an item as follows: Cost = revenue – margin * revenue / 100.
Use Of Terminologies
Remember, while using the margin calculator you should not focus on the blurry definitions of terminologies such as margin, gross margin and profit margin, as some of the terms can be used interchangeably.
The most important part of the calculation is to know how to treat this data. The margin calculator will work as your profit margin calculator or as a gross margin calculator.
Final Thoughts On Using A Margin Calculator
As a business owner, you need to determine whether or not you’re running a profitable business on a regular basis. Understanding the financial health of your business will also help you when partnering with other businesses and applying for a loan.
In fact, lenders and creditors prefer working with businesses with higher profit margins than those with lower profit margins. Using a margin calculator to analyze your profit margins regularly will help you keep tabs on your business’s profitability.