Profit is the surplus value from trading activities. So what types of profits are there? How to calculate the gross profit margin from the business accurately?

Besides manual calculations, you can go to the profit margin calculator. If you are struggling with this tool, do not skip the detailed guides in the article below. I will give you some simple tips and steps to handle the most complex math operations. Let's explore them now!

Type Of Profit Margins

Profit margin is a parameter that clarifies the profitability of a business. This parameter is the combined gross, operating, and net profit calculation result.

The higher the profit margin and the more profitable the business is. Depending on the business sector, these parameters will vary. 

In financial statements, people often use three main profit hierarchies: Contribution margin, operating profit, and net profit.

Gross profit margins

Gross profit margin is a widely used profit in measuring profitability. This index refers to the income earned after deducting the cost of goods sold from the net operating net sales.

Capital is the costs associated with raw materials, labor, plant operations, and others. Gross profit will help business people determine work efficiency.

The higher the ratio, the greater the total return per dollar of sales, resulting in superior profitability for the company.

To calculate gross margin, you can apply the gross margin formula below:

Gross profit = (Net sales - Cost of goods sold)/Net sales *100.

Operating profit margin

When selling an item to the market, manufacturers must invest in the product and spend on marketing, management, and research. They must also consider depreciation and distribution costs.

These costs will also have a significant impact on profits. And in the company's business reports, the operating profit margin is an indispensable parameter.

Operating profit requires more complex calculations than gross profit. This type is the result when calculating the general expenses for the business to maintain the management, net income, and operational activities. 

This expense also includes property depreciation, which does not include liabilities and taxes. Because of these characteristics, sometimes a company's gross margin can be pretty high, but its operating margin is shallow.

Business owners will understand cost management when operating profit is calculated and evaluate the return on investment. From there, CEOs will also take measures to enhance business efficiency.

Here's the usual operating profit formula:

Operating Profit = (Operating Income/Revenue)*100.

Net profit margins

The net profit margin shows how efficiently the business unit turns income into profit. The total revenue subtracts the additional costs and income in this case. 

These costs include the capital cost of goods sold, operating expenses, taxes, and liabilities. Investors need a net profit margin to evaluate a business's interest management and tax payments.

To calculate net profit, you will need to use the profit margin formula below:

• Net profit = (Net Income/Revenue)*100.
• Net Income = Sales - Annual Cost - Operating Expenses - Other Expenses - Interests - Taxes.

Which Profit Margin Formula Is the Most Useful?

Net profit margin is quite an essential tool for investors and retail traders. In particular, this number also appears in corporate financial statements. 

This parameter helps the company control all costs of goods sold related to business activities. As a result, the company can better manage expenses in the area of ​​interest and tax.

In addition to the net profit margin, you must use many other formulas to manage revenue. The operating profit margin, for example, will be necessary for determining the percentage of funds remaining.

Market factors will constantly affect the three types of profit margins, making net profit margin sometimes not the most critical metric. 

For example, when direct selling expenses increase, a company with a low gross margin will have high selling expenses.

How To Calculate Profit Margins?

The profit margin calculator is the simplest method to get accurate numbers quickly. To use the tool, you must determine the item cost and desired profit percentage in advance.

You can also use the calculator to calculate variables included in the sales process, such as cost, sales, and profit. If you want to calculate the gross profit margin shows yourself, apply the profit margin formula: 

Gross Profit Margin = Profit Metric/Revenue.

If your COGS is $50; your sales are $70, your gross profit would be calculated by subtracting your costs from revenue: Profit metric = $70 - $50 = $20.

Profit margin according to your sales will be calculated with the formula: 

Gross profit margin = $20/$70 = 0.28.

Then multiply the result by 100 to express the profit margin as a percentage.

The profit margin formula is not a complicated calculation. You don't have to calculate steps to get COGS; use revenue and simple percentage calculation.

How To Calculate Profit Margin In Excel?

In addition to using the usual margin calculator, you can use Microsoft Excel. Spreadsheets help you calculate profits quickly and efficiently. If you have never used a worksheet to calculate profit before, refer to the instructions below:

Calculate net profit margin

Net profit margin is an important parameter that shows the profitability of a business. And you can completely calculate this parameter using Excel.

• Step 1: Open Microsoft Excel, and create the columns Revenue, Expense, and Net. The resulting column will be labeled Net Profit Margin.
• Step 2: Import the data from the income statement into the worksheet.
• Step 3: Calculate net profit by entering the formula: Net = Total revenue - Total cost.
• Step 4: Calculate the net margin by entering the formula: Net margin = (Net profit/Total sales)*100.

Gross profit margin

With gross profit margin, you can calculate easily with Excel by entering data into a worksheet. After you've labeled all the columns, in the gross margin column, enter the formula:

Gross profit margin = [(Total revenue - the cost of goods sold)/Total revenue] ∗ 100.

Operating profit margin

You'll have to use operating profit margins to gauge a company's business performance. And in Excel, this parameter is calculated by the formula:

Operating profit margin = [ Total revenue - (Cost of goods sold + Sales and administrative expenses) / Total revenue ] ∗ 100.

Tips for using Excel to calculate profits

To simplify the calculation process when using Excel, you should apply the tips:

• Review the format in the input columns to unify the display parameter values.
• It's a good idea to create a gross profit margin template to save time.
• Look for templates online to be more productive.
• Correctly recheck the operation if abnormal values are detected, including negative values.

Margin Vs. Markup

Both profit margin and markup are terms that are used quite widely in business. To calculate these two parameters, you must use revenue and expenses.

Yet, the gross profit margin and markup will be slightly different. To estimate profit margins, you subtract the cost of goods sold from sales. In contrast, markup is the difference between the final selling price and the spread price.

Markup is the retail price of a product. Meanwhile, the profit margin is more important, related to the overall revenue and expenses for the business.

Frequently Asked Questions

How does a gross margin calculator work?

A gross margin calculator can do a lot of work: Find the revenue, divide gross profit, and express results as a percentage to calculate margins.

What is a 20% margin?

A 20% return will have a markup gross margin percentage of 25%.

How much is a 50% margin?

The 50% profit margin is relatively high. For further explanation, when your cost per product is $100 while the resale price is $200, the gross profit margin is 50%.

How do I calculate a 40% margin?

The profit margin formula to calculate profit per product is: Selling price = Cost / (1-GM%).

While applying the above one, to achieve 40% profit on the initial cost of 100 USD, you will get: Selling price = 100/(1-0.4)= 166.6.

To sell a $100 item with a 40% profit, you would have to sell that item for $166.6.

What is a good margin?

A reasonable profit margin will depend on the size of the business and the business sector. Typically, an excellent after-tax profit margin for an SME will be in the range of 7% - 10%.

Retail companies will have lower profit margins. The reason is that these companies have to spend a lot of money to maintain operations.

Conclusion

There are many ways to measure a particular business margin profit. The margin calculator is the most helpful tool to help you get accurate results quickly.

Through sharing in the article, you will better understand this calculation tool and can take advantage of it more effectively for your business.

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