Margin Calculator
By Alastair Hazell.
Reviewed by Chris Hindle.
Disclaimer: Whilst every effort has been made in building our calculator tools, we are not to be held liable for any damages or monetary losses arising out of or in connection with their use. Full disclaimer.
By using the margin calculators, you can get a gauge of the financial health of your business and, specifically, how well it turns its revenue into profit. Below we take a closer look at gross margin, sales margin, net profit margin and operating margin and what they mean for your business. We'll start with how to calculate your gross margin.
How to calculate your gross margin
Gross margin is commonly used to measure the overall profitability of a business. It demonstrates the percentage of revenue over and above the costs involved in making the products (COGS - cost of goods sold). COGS includes materials and labour involved directly in production.
Whether you're calculating the gross margin for a single product or for your entire business, the method is the same. Simply divide your gross profit (sales revenue minus your cost of goods sold) by your sales revenue.
- Product-Level Example:
If you sell a product for $50 and it costs you $30 to produce, your gross margin would be:
(50 - 30) / 50 = 0.4 = 40% - Business-Wide Example:
If your company earns $50,000 in revenue and your cost of goods sold works out at $30,000, your gross margin would be:
(50,000 - 30,000) / 50,000 = 0.4 = 40%
Step-by-step example
Let's go through the calculation process in more detail with this 5-step-process:
- Work out your cost of goods sold (COGS):
The COGS includes all direct costs you incur through producing your goods or services (such as materials and labor).
Example: $30,000 - Find out what your total revenue (sales) is:
The total revenue is the amount of money earned from selling your goods or services.
Example: $50,000 - Calculate your gross profit:
Subtract the COGS from your total revenue figure to find your gross profit.
Example: $50,000 - $30,000 = $20,000 - Divide your gross profit by the total revenue:
This gives you your gross margin as a decimal.
Example: $20,000 ÷ $50,000 = 0.4 - Convert your figure to a percentage:
Multiply your result by 100 to get a percentage.
Example: 0.4 × 100 = 40%
You can check your result against our calculator at the top of our page.
The NYU Stern School of Business website features a useful report containing average net margin and gross margin figures by US industry sector. The report shows that gross and net margins vary greatly by sector, with industries such as banking, financial services, software and drugs currently having the highest gross margin. Sectors such as banking, transportation and financial services currently have the highest net margin.
What is sales margin?
The sales margin measures how much money you retain on the sale of an item or service after direct costs are deducted. It shows your level of profitability before operating expenses are deducted.
How to calculate sales margin
The sales margin of a product or service can be calculated by taking the selling price, deducting the expenses it took to make the product and then dividing it by the selling price. Expenses can commonly include materials, manufacturing costs, salaries, rents, discounts, etc.
You can check your figure against our calculator at the top of our page.
Example of sales margin calculation
Let's say that you sell a product for $60 and your costs to make the product are $40.
Calculating markup
Markup is the difference between the selling price of an item and its cost. It is calculated by dividing the profit figure by the cost figure and is represented as a percentage.
Calculating selling price
Using our calculator you can work out the selling price for your products, based upon the cost of materials and percentage of profit as a markup that you are looking for. The profit margin formula will then calculate a selling price for you.
What is net profit margin?
Net profit margin is used to calculate the percentage of sales revenue that remains as true profit, after all costs and expenses are accounted for. It acts as a measure for the amount of net income (or net profit) a business makes per dollar or pound of revenue earned.
How to calculate net profit margin
To calculate your net profit margin, take your total revenue figure (all types of income) and deduct your total expenses (tax, labour, materials, advertising, debt repayments, etc) to get your net income (or net profit) figure. Then, you divide that figure by your total sales revenue. For a more in-depth explanation of this, see our article about the profit margin formula.
You can check your figure against our calculator at the top of our page.
Example of net profit margin calculation
Let's say that your business took $400,000 in sales revenue last year, plus $40,000 from an investment. You had total expenses of $300,000.
This means that for every $1 of revenue, the business made $0.35 in net profit.
The website Investopedia has a great article about how to determine what your ideal profit margin should be.
What is 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.
The difference between gross profit margin and operating profit margin is that the gross profit margin includes direct production costs only (materials, labour involved directly in production), whereas operating profit margin takes into account for all operating expenses (labour, rent, office supplies, utilities, advertising, travel costs, insurance and taxes, etc).
Operating profit margin can often be a preferred metric over net profit margin when analysing the performance of a company. This is because each company has a very different capital structure which leads to different levels of tax and interest paid. So whilst net profit margin is good for shareholders of that individual company to work out what they'll actually get in their pocket (assuming dividends are paid out), it isn't very useful when comparing other companies competing in the same space. This is where operating profit becomes a more useful measure.
This is also the case for internal operational managers who want to work out how efficient their company is at making money and whether there are any ways of improving this.
How to calculate operating profit margin
To calculate your operating profit margin, take your operating income and divide it by your sales revenue.
Example of operation profit margin calculation
Let's say that your business took $600,000 in sales revenue last year and had operating expenses of $500,000.
Creating strategies and goals
You can use your gross margin, sales margin and net profit margin to get an overall picture of how your business is performing and develop future strategies and goals for improving efficiency and driving profit growth. And don't forget to check back and use our margin calculator whenever you need it, to help you with your calculations.
Before you go...
You may wish to consider bookmarking our percentage calculator, for quick percentage calculations whilst on the move. Also, check out our full range of finance calculation tools covering important elements of business management.