HomeProductsAccountingMargin: Definition, Types, How to Calculate, and Examples

Margin: Definition, Types, How to Calculate, and Examples

In running a business, the financial aspect is very important. There are several financial terms that every business voter should know, namely margin. It has a close linkage with product sales, profits, production costs, and other important business aspects. Don’t worry, Hashmicro will explain everything about the margin that you need. Let’s see the complete information below!

What is Margin?

Margin is a term to describe the difference between profit and turnover or interest and taxes in a business in the form of a percentage. This percentage shows the amount of profit from the product you are selling. The term margin is also often referred to as profit which is the difference between costs and sales in accounting.

Companies generally reduce margins to produce more products at lower prices. This is because the company chooses to increase profits from increased sales in the market. In general, product sales will increase when the price of a product is lowered by several promotional methods such as discounts and others. 

Types of Margin and How to Calculate It

There are several types of margins used in defining the results of calculations in a business. Profit or margin is divided into several types based on the purpose of the calculation and the calculation formula used. But, before you calculate it you must first know the Cost of Product Sold, the total net sales, the total cost of production as well as the company’s expenses and sources of income. The following are the types of margins and how they are calculated:

Net profit margin

Net profit margin is the amount of profit deducted by income tax. This one is aiming to determine the profitability of the business after deducting basic costs and COGS. If the calculation gets big results, the better the business that is running. To calculate it you can use this formula:

Net profit = ((Revenue – (COGS + operating expenses + interest + taxes + other expenses) : Revenue) x 100

Gross profit margin

Gross profit margin is the ratio between gross profit and revenue receipts. This calculation aims to determine the efficiency of the calculation of the Cost of Products Sold and production costs. By calculating the gross profit you can find out which products are the most profitable. If the calculations get large results, your operational efficiency is getting better. This is a formula to calculate it :

Gross Profit = ((Total Revenue – COGS) : Total Revenue) x 100

Operating profit margin

The operating profit margin is the net profit that has not been subject to tax and interest. This calculation aims to determine the level of ability of a business in generating operating profit from net sales. So, this is the formula to calculate it :

Operating Profit Margin = (Revenue : Operating Income) x 100

Calculation Example

In calculating margins, recording transactions, grouping accounts, and various other things, a good financial report is required, which consists of a profit and loss statement, a statement of changes in equity, and others. After describing each margin calculation formula above, here are examples of the calculation:

Example of gross profit margin

You want to sell a book for IDR 25,000.00. In the production process, you have a cost of products sold of IDR 20,000.00. How much is the gross margin from your business selling the book?

 Gross Profit = (Total Revenue – COGS) / Total Revenue x 100%

= (25,000 – 20,000) / 25,000 x 100% = 5,000 / 25,000 x 100% = 0.2 x 100% 

= 20%

So, you make a gross profit of 20% on every book you sell.

Example of net profit margin

You own a company with an income of IDR 25,000,000.00. Apart from that income, you have a COGS of IDR 5,000,000.00 when you create a product. Then, you have operating expenses of IDR 5,000,000.00, taxes of IDR 1,500,000.00, and other costs of IDR 1,500,000.00. How long is your company?

Net Profit = (Total Revenue – COGS – Operating Expenses – Tax Expenses – Other Expenses) / Total Revenue) x 100%

= (25,000,000 – 5,000,000 – 5,000,000l – 1,500,000 – 1,500,000) / 25,000,000) x 100%

= 0.32 x 100% = 32%

So, your company’s net profit margin is 32%

Example of operating cost margin

You own a clothing store and want to see operating profit margins. Before that, You saw that your total income was IDR 15,000,000 and you had an operating income of IDR 50,000,000.00. What is the operating profit of your clothing store business?

Operating cost Margin = (Total Revenue / Operating Income) x 100%

= (15,000,000 / 50,000,000) 100%

 = 0.3 x 100% = 30%

So, the operating profit margin of your clothing store is 30%.

Conclusion

The margin itself is a very important calculation for a company’s financial strategy. The management of the company generally determines the margins or business profit with several considerations that will become the basis for making decisions for running a business such as sales of products, marketing processes, prices of products, a quantity of production, and others.

The following is an explanation of the margin along with an example of its calculation. If you have a business, the calculation of it is crucial to determine all decisions related to your business. You can manage the cash flow, generate financial reports, adjust journals, and others automatically, effectively, and integrated with the best Accounting software from Hashmicro. Let’s move to Hashmicro to achieve better operational efficiency for your company!

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