How to Define Operating Margin

Operating Margin is an important measurement a company uses in evaluating its financial performance. Operating Margin measures a company’s profit after Costs of Goods and Operating Expenses.Higher Operating Margin is generally preferred. It provides the company with a financial cushion to invest back into the firm as well as pay taxes, interest, and ultimately shareholders. Operating Margin can be calculated by using Revenue, Costs and Expenses.

Things You'll Need

• Calculator

Instructions

1. Calculate Gross Profit first. Take total Gross or Sales Revenue, minus total Sales Costs. If you sell your widget for $10, and it costs you $4 to make or buy wholesale, your Gross Profit is $6.

2. Calculate Operating Income. From your Gross Profit, deduct the costs involved in running your business, which are known as Operating Expenses. These include such expenses as General & Administrative, Sales & Marketing, and Research & Development. Gross Profit minus Operating Expenses equals Operating Income.

3. Divide your Operating Income by your Gross or Sales Revenue. If your Revenue is $10, it costs $4 to make the widget, and Operating Expenses are $3, your Operating Income will be $3. Divide $3 by $10, for a 30% Operating Margin.

Tips & Warnings

• Take a look at the Sample Income Statement in Additional Resources below to get a better sense of how different Margins fit in context with a company’s financials.