How to use this Profit Margin Calculator?
- Enter the value of cost and the desired profit margin.
- Press CALCULATE to calculate the value of revenue and profit based on the entered cost and desired profit margin value.
- Click RESET to reset the entered values and start a new calculation. (You can also start a new calculation without pressing RESET).
What is Profit Margin?
Profit margin is the measure of profitability which is calculated by dividing profit by revenue. You can use above Profit Margin Calculator to calculate revenue and profit for certain value of profit margin. Profit margin measures how much money a company or business activity makes by dividing income by revenues. Profit margin is expressed as a percentage and it indicates how many cents of profit are generated for every dollar of sales. For example, a 20% profit margin means there is $20 of net income for every $100 of revenue. The formula to calculate profit margin is:
Where, (Revenue – Cost) = Profit
Profit Margin represents the percentage of profit in the total revenue. For example, you sell an item for $10 with the cost of $8. Here, your profit is $10 – $8 = $2. So, the profit margin is ($2/$10)*100 = 20%.
In the above pie chart, the full circle represents the total revenue. The red portion shows the part of cost in revenue while the blue portion shows the part of profit which is profit margin.
So, the profit margin simply tells the percentage of profit in revenue.
In above example, if you sell the item at $12, then your profit is $4 and profit margin is ($4/$12)*100 = 33.33%, which is one third of the revenue. Increase in profit increases the profit margin.
Since, profit is measured in two ways, gross profit and net profit, profit margin is either gross profit margin or net profit margin depending on the type of profit used in calculation.
Why is profit margin important?
Profit margin is one of the commonly used profitability ratio to assess your profit. It is one of the financial metrics used to evaluate a company’s ability to generate earnings in relation to its revenue. To stay fiscally healthy, businesses must pay attention to profit margins. Profit margins indicate how well a company is performing. A high profit margin indicates that a company can control its costs in an effective way through efficient management.
Why Profit Margin is always less than 100%?
Profit margin is 100% when revenue is equal to the profit. It means that you are selling something that costs zero to generate the revenue. This is an absurd case which is only possible when you are selling items you got for free like gifts.
