Profit margin (calculation)

Profit margin is a simple and important metric businesses use to measure profitability. It's calculated by dividing net profit by total revenue and expressing it as a percentage. Understanding profit margin can help businesses control costs, make pricing decisions, and track overall financial health.

The formula to calculate profit margin is straightforward:

[

\text{Profit Margin (%)} = \frac{\text{Net Profit}}{\text{Total Revenue}} \times 100

]

Here's what each element represents:

• Net Profit: The total revenue minus all associated costs—including costs of goods sold (COGS), operating expenses, taxes, and interest.
• Total Revenue: Total income generated from sales of goods or services.

For example, if your company generated $50,000 in total revenue and had $10,000 left after deducting all costs, profit margin would be calculated as:

[

\frac{10,000}{50,000} \times 100 = 20%

]

This indicates you retain $0.20 profit for every dollar in sales.

Regularly calculating profit margin helps you quickly identify profitability issues, adjust pricing strategies, and manage expenses effectively. As a foundational business calculation, profit margin is an essential tool every entrepreneur should master.