If you're running a small business, you need to know how much you are earning versus how much your business is spending overall. This can be done by calculating profit margins. There are two kinds: operating profit margin and net profit margin. Both compare your earnings to your gross sales as a ratio. Operating profit margin is a way to measure your profitability before interest and taxes.
- Skill level:
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Things you need
- Expense sheet
Gather all your expense paperwork, sales receipts and your gross earnings for the year.
Calculate your entire earnings for the year or period you are calculating the ratio for, excluding the cost of interest and taxes. This will be larger in most cases than the amount you earned after taxes, which is used to calculate your net profit margin.
Calculate your gross sales for the year. This can be done using your company's bookkeeping software or you can add up all your receipts for service or orders on a calculator.
Divide the earnings before taxes by your sales for the year. The formula looks like this: earnings before taxes and interest/sales = operating profit margin.
Tips and warnings
- Expressed as a percentage, operating margin indicates the percentage of each dollar of revenue that's profit.
- Look at your operating margin over time to determine if your company is growing profitably.
- Compare your company's operating margin ratio to that of competing businesses in your industry.
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