Profit Margin
A financial ratio showing the percentage of sales that has turned into profits after costs.
Definition
Profit Margin is a financial ratio that measures the percentage of sales that has turned into profits. It essentially tells you how many cents of profit a business keeps for every dollar of revenue it generates.
Why It Matters
Revenue is vanity; profit is sanity. A business might generate millions of dollars in revenue, but if its expenses are too high, it might actually be losing money. Profit margin is the ultimate indicator of financial health and efficiency.
There are three main types of profit margins you need to track:
- Gross Margin: Revenue minus the direct cost of goods sold (COGS).
- Operating Margin: Gross margin minus daily operating expenses like rent and salaries.
- Net Margin: The final "bottom line" after all expenses, interest, and taxes are paid.
Practical Example
Let's calculate the Net Profit Margin for a small business:
- Total Revenue: $100,000
- Total Expenses (materials, rent, salaries, taxes): $85,000
- Net Profit: $15,000
($15,000 ÷ $100,000) × 100 = 15% Net Profit Margin.
This means the business keeps 15 cents of profit for every dollar it earns.
If you want to calculate your own business margins or product pricing, use our Profit Margin Calculator.
Frequently Asked Questions
What is a good profit margin?
It varies heavily by industry. Grocery stores operate on 1-3% net margins, while software companies can easily hit 20-30% net margins.
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