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Home » Run Your Business

What is Profit Margin?

what is profit margin

What is Profit Margin?

Profit margin is one of the most important measures in your business. It is a measure of profitability.

It is calculated by dividing the difference between sales and costs and dividing it by the sales, then multiplying the answer by 100 to turn it into a percentage.

Put another way, profit margin is the percentage of sales revenue that is turned into profit.

Profit margin differs from the one of the other profitability related terms such as “mark-up” (also known as profit percentage or profit on cost), as it is calculated on sales, where as mark-up is calculated on cost.

Uses of Profit Margin

Profit margins are mainly used as as an internal comparison to measure the performance of a business. (Whether that’s your own business or examining the performance of a business you want to invest in or acquire.)

As a business owner, you can use profit margins to compare profitability of a product or service over time (i.e. are costs increasing or are sales decreasing?) or they can be used to compare against other products or services.

How to Calculate Profit Margin

Profit Margin is calculated by deducting the total costs of a product or service from the sales revenue of the product or service and dividing it by the sales revenue, multiplying by 100.

Example:

Sales: $100

Costs: $60

Profit: $40 (Sales- costs)

Profit Margin is:

Profit x 100
Sales

How to Calculate Mark-up

Mark-up is calculated differently to profit margin. For example profit is divided by costs:

Profit x 100
Costs

Mark-up is simply the amount added to the cost price of goods or services to cover overheads and profit.

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