Profit Margin Calculator

The formula this calculator uses

Profit margin = (Revenue - Cost) / Revenue x 100%

R

Revenue — what customers paid, before any costs come off

C

Cost of what was sold, matched to the margin you want

R - C

Profit left after cost, the numerator of the fraction

m

Margin as a decimal; multiply by 100 for the percentage

How to check the result by hand

1. 1

   Decide which margin you actually need

   Gross margin takes off only the cost of goods sold; operating margin also removes overhead, payroll and marketing; net margin takes out interest and tax as well. Pick one before you touch a number, and label the result with it. Three correct answers exist for the same period, and an unlabelled percentage invites the reader to assume the most flattering one, which is usually the gross figure. Write the layer into the column heading rather than into a footnote nobody reads.

2. 2

   Total the revenue for the period

   Use what customers actually paid, net of refunds and discounts already granted. Do not use list prices or forecast billings. This figure is the denominator, and because it sits at the bottom of the fraction, overstating it quietly improves every margin derived from it.

3. 3

   Total the matching cost

   For gross margin this is the cost of goods sold: materials, purchase price, freight in and direct labour. For net margin it also carries rent, salaries, marketing, payment fees and interest. The discipline is matching — whatever you call the margin, the cost has to be the set of expenses that label promises. Where a cost serves several periods at once, apportion it rather than dropping it, because a cost left out of the sum is a margin quietly overstated.

4. 4

   Subtract, then divide by revenue

   Revenue of 200000 less cost of 150000 leaves profit of 50000. Divide that by revenue, not by cost: 50000 / 200000 = 0.25, or 25%. Dividing by cost would give 33.3333%, which is a markup, and reporting it as a margin overstates profitability by a third of the stated figure.

5. 5

   Cross-check with the conversion, or price backwards

   Convert the figure into markup and back with margin = markup / (1 + markup); 0.3333333 / 1.3333333 returns 0.25, confirming the base was revenue. If instead you are setting a price, invert the formula: cost of 150000 against a 25% target is 150000 / 0.75 = 200000, whereas adding 25% to cost yields 187500 and a real margin of 20%.