The gross profit margin calculator provides assistance for calculating profit margin. The total revenue that a company earns includes the cost involved in producing the goods (Cost of Goods Sold). These two parameters are also used in calculation of profit margin.
Understanding Profit Margin
In simple terms, margin is the difference between the revenue a company has earned and the cost of goods sold. This difference is expressed as a percentage of revenue. When the value of margin is determined, it is taken as a ratio of revenue and the results is multiplied by 100.
Profit Margin is used for various financial purposes including checking the financial state of a company. When one company plans to purchase a firm or take managerial control, it checks the profit margin. If the value of margin is negative, it means that the company is facing losses and a zero profit margin gives the impression that there are no profits or losses. However, a positive margin value shows that a company is on a profitable route.
Companies monitor the profit margin in various financial paradigms. Some firms check the margin for each investment while the others perform this check annually.
A note on terminology
All the terms (margin, profit margin, gross margin, gross profit
margin) are a bit blurry and everyone uses them in slightly different
contexts. For example, costs may or may not include expenses other than COGS
- usually, they don't. In this calculator, we are using these terms
interchangeably and forgive us if they're not in line with some
definitions. To us, what's more important is what these terms mean to most people,
and for this simple calculation the differences don't really matter.
Luckily, it's likely that you already know what you need and how to
treat this data. This tool will work as gross margin calculator or a profit margin calculator.
How to calculate profit margin
- Find out your COGS (cost of goods sold). For example
- Find our your revenue (how much you sell these goods for, for example
- Calculate the gross profit by subtracting the cost from the revenue.
€50 - €30 = €20
- Divide gross profit by revenue:
€20 / €50 = 0.4.
- Express it as percentages:
0.4 * 100 = 40%.
- This is how you calculate profit margin
Gross margin formula
The formula for gross margin percentage is as follows:
gross_margin = 100 * profit / revenue (when expressed as a percentage). The profit equation is:
profit = revenue - costs, so an alternative margin formula is:
margin = 100 * (revenue - costs) / revenue.
Now that you know how to calculate profit margin, here's the formula for revenue:
revenue = 100 * profit / margin.
And finally, to calculate how much you can pay for an item, given your margin and revenue (or profit), do:
costs = revenue - margin * revenue / 100
What's the difference between gross and net profit margin?
Gross profit margin
is your profit divided by revenue
(the raw amount of money made). Net profit margin
is profit minus the price of all other expenses
(rent, wages, taxes etc) divided by revenue. Think of it as the money that ends up in your pocket. While gross profit margin is a useful measure, investors are more likely to look at your net profit margin
, as it shows whether operating costs are being covered.
How do I calculate a 25% profit margin?
- Express 25% in its decimal form, 0.25.
- Subtract 0.25 from 1 to get 0.75.
- Divide the original price of your good by 0.75.
- There you go, this new number is how much you should charge for a 25% profit margin.
What is sales margin?
Your sales margin
is the product of the selling price
an item or service, minus the expenses
it took to get the product to be sold, expressed as a percentage
. These expenses include: discounts, material and manufacturing costs<, employee salaries, rent, etc. While this is very similar to net profit, sales margin is in per unit terms
What is a good margin?
There is no definite answer to 'what is a good margin
' - the answer you will get will vary depending on whom you ask
, and your type of business
. Firstly, you should never have a negative gross or net profit margin
, otherwise you are losing money. Generally, a 10% net margin is poor, 20% is okay, while 30% is considered a good margin
. There is no set good margin for a new business
, so check your respective industry for an idea of representative margins
, but be prepared for your margin to be lower.
Are margin and profit the same?
Although both measure the performance of a business, margin and profit are not the same
. All margin
metrics are given in percent values
, and therefore deal with relative change, good for comparing things that are operating on a completely different scale. Profit
is explicitly in currency terms
, and so provides a more absolute context - good for comparing day to day operations.
How do I calculate markup from margin?
- Turn your margin into a decimal by dividing the percentage by 100.
- Subtract this decimal from 1.
- Divide 1 by the product of the subtraction.
- Subtract 1 from product of the previous step.
- You now have markup expressed in decimal form
- If you want to have markup in percentage form, multiply the decimal by 100.
Not all inventory management systems are created equal, so it’s important to know all the facts before you dive in and choose one.
If you’re ready to grow your business and simplify your inventory and order operations, start your free trial
with Joyce Software today.