During the business planning phase, you likely estimated your profit margins based on the
price you thought you could charge and the price you thought you would pay to make your product. As the
business evolved, you found that your estimates were far from accurate and both prices and costs
fluctuated, taking your profit margins along for the ride.
This calculator can help determine your gross profit margin, operating margin, net profit
margin, and how your business compares to peers in your industry.
How to Calculate Profit Margin
Profit margin is calculated by subtracting the cost from the revenue, divided by the revenue. Basically,
you take the money you made minus the money you spent and divide that figure by the money you made to give
you the amount represented as a percentage.
Gross Profit Margin Formula
Gross Profit Margin =
Revenue - COGS
For example, if you sell a product for $55 and it costs you $45 to make, your gross margins would be $55
- $45 / $55 or 18%. The problem is that although COGS may reflect the product cost, it likely does not
incorporate all the expenses your business incurred.
The process of calculating gross, operating, and net profit margins is a matter of narrowing in on the
variable costs incurred.
Operating Profit Margin
Operating profit margin is a measurement of what proportion of revenue is left over after paying for
variable costs of doing business such as wages, raw materials, etc. A healthy operating margin is required
for a company to be able to pay for its fixed costs, such as interest on debt.
Operating Profit Margin Formula
Operating Margin =
Gross Profit - Operating Expenses
Net profit margin is the percentage of revenue remaining after all operating expenses, interest, taxes,
and preferred stock dividends (but not common stock dividends) have been deducted from a company's total
Net margin is the percentage of revenue that remains after deducting all expenses. If you’re a
sole-proprietor, this would be the percentage of revenue that ends up in your pocket. If you struggle with
differentiating between gross vs. net profit, as a mnemonic to help remember, you can think “gross
profits are grossly overstated, net is what you get.”
Net Profit Margin Forumula
Net Margin =
Operating Profit - Interest - Taxes
Profit Margin Variability
As you can see, the process of calculating your profit margins is a matter of including more and more
variable costs to find your true profitability. Nearly every business deals with variability in their
economics. Sometimes, the dynamics can work in favor of the business — such as a decline in costs
due to economies of scale.
Other times, an unforeseen tax implication, lawsuit, labor strike, or other event can cause profit
margins to decline, if not erase and turn into a loss.
This is why calculating your profit margins should be an ongoing process. Bookmark this calculator and set up a business profile on EquityNet to get
insights for your industry, funding for your business, and more.