How to Figure Profit Margins in Business

Businesses compute a number of different profit margins.

A company's profit margins can give it an indication of whether it is operating efficiently enough, or charging enough for its products. Most businesses compute gross profit margin and operating profit margin. These are expressed as a percentage of sales. It is easy to calculate the gross and operating profit margins as long as you have good records of sales and expenses.

Instructions

Gross Profit

1. Accumulate the total sales figures for the company for the period under examination. This includes all items shipped and billed to customers, regardless of whether they have been paid for.

2. Compute the cost of sales. This should include all costs tied directly to the production of items, including material costs, labor costs and freight costs.

3. Subtract the cost of sales figure from the sales figure. The result is gross profit.

4. Divide gross profit by sales to determine your gross profit margin.

Operating Profit

1. Add up all general, administrative and selling expenses. These would include all costs not allocated to cost of sales, such as advertising expenses, office expenses and administrative salaries. Do not include interest and income taxes.

2. Subtract all general and administrative and selling expenses from gross profit. The result is operating profit.

3. Divide operating profit by sales to determine your operating profit margin.

References

• Investopedia; A Look at Corporate Profit Margins; Ben McClure, 2011