How to Determine a Profit Margin

In business, cash is king. This is clear at the end of every month when accountants scramble to close the books and create reports for senior management. One key benchmark that managers are always looking for is profit margin. It's a quick way to let all stakeholders know where a business is and what direction the next month's operation may need to take. Determining profit margin is a relatively simple process.

Instructions

Difficulty: Moderately Easy

1. Determine the total revenue. This may be a matter of timing for many companies. Sales, or revenue, may be calculated when the service or item is delivered. It may be calculated when the cash transaction takes place. This determines which sales are included in which month's revenue.
2. Calculate the expense. This may also be called COGS (Cost of Goods Sold). Whatever costs are included in the cost of doing business apply here. For people-driven businesses, this may be payroll costs. Expenses are basically whatever it took to create the revenue.
3. Subtract expenses from revenue. This equals gross profit. The profit margin is reached when the gross profit is divided by the revenue. A higher profit margin percentage means the business is more profitable.
4. Use the profit margin as a tool. Compare the percentage to similar companies in the industry to determine if profit margin is in line with like businesses. It is also used to determine if expenses are too high or if charges for goods and services are too low.