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Profit Margin

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Profit margin is one of the most commonly used profitability ratios to measure how much money a company or business is making, indicating what percentage of sales have turned into profit.


What is Profit Margin ?

Profit margins are how much money you are making with your business. Profit margin calculates and measures your business profitability with this you also know whether you are actually making a good amount of money from your business or not. It also represents your business or company's net income when divided by revenue.

When you sell something to your customers the amount you get is the whole amount of your product or services. when you subtract the company’s expenses from its total revenue you will get a profit margin. To get the exact amount of profit margin you directly put your values in the formula.

Why is profit margin important ?

Profit margins are important because you need to know how your business is performed and how much direct profit you got from the revenue. Sometimes when starting any business you set a Profit margin but day by day if you grow automatically your expenses increase multiple will get added to your business that time you need to understand if you do not reduce expenses or increase the selling price your business will get stuck or lose financially.

If you understand and always calculate the profit margins you get an idea of which services or products give you less revenue or you know when your expenses increase and how you manage them to get more profit.

Types of profit margin

1. Gross profit margin

Gross profit margin is the simplest and most used metric because it defines the profits of all income that remains after accounting for the COGS (cost of goods sold). This includes only those expenses that directly come with the production or manufacturing unit of the item it includes raw materials and wages for labor.

This Excluded other things like any expenses for debt, taxes, and one-time costs such as equipment purchases. The gross profit margin is your overall revenue minus the cost of goods.

The formula for gross profit margin is:

Gross profit margin = Revenue - COGS/ Revenue * 100

2. Operating Profit Margin

Operating Profit Margin metric for operating costs, administrative costs, and sales expenses. It contains amortization rates and asset depreciation but Operating Profit does not include taxes, debts, and other executive-level costs. operating slightly more complex than gross margin.

Operating Profit tracks necessary metrics to run operating, administrative, and sales expenses of business day by day basis.

The formula for Operating Profit Margin is:

Operating Profit = Operating income / Revenue * 100

3. Net profit margin

Net profit margin is the most difficult and complex type of profit margin to track but it gives you the most insight into your bottom line of business.

They track all ll expenses and income from other sources such as investments while setting up a business or running a business.

The formula for Net Profit Margin is:

Net profit margin = Revenue - Cost / Revenue * 100

or

Net Profit margin = Net Profit / Total revenue * 100

FAQ

Q. How do you calculate the profit margin?

Ans. With the help of Gross, Operating and Net Profit margins fourmula you can calculate the profit margin.

Q. What is a good margin for profit?

Ans. The good profit margin for small business is between 7% to 10%.

Q. How to improve profit margin on Shopify store ?

Ans.  There are many things to focus on to improve profit margin on a Shopify store. Read the complete guide to improve profit margins on your Shopify store, here.