How to Figure Out Profit Margins

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Profit margin is a ratio that will aid you in comparing the profitability of different companies, no matter how much money they make. Using profit margins, you can even compare your small business' profit to a multi-million dollar corporation's profit. This step-by-step guide will show you how to determine your profit margin.

Things You'll Need

  • Paper
  • Pencil
  • Calculator
  • Business statistics

The Process

Determine the revenue. This is the total amount of money made by a company by their goods and services. Simply, this would be the number of goods multiplied by the price of the good. For example, ACME company sells only rocket skates and they sold 18,000 rocket skates to a certain coyote (their best customer) for $50 each. To determine the revenue, you would multiply 18,000 by $50, which is $900,000.

Determine the net income. This is the revenue minus the cost of producing the good. For example, if it costs $50,000 for the ACME company to produce 18,000 rocket skates (this covers the cost of materials and paying for labor and other associated costs), then to determine the net income, subtract $50,000 from the revenue of $900,000, ($900,000 - $50,000 = $850,00)

Divide the net income by the revenue. In the example this would be $850,000 by $900,000, ($850,000 / $900,000 = 0.944). The result is a ratio, 0.944 is the profit margin.

Profit margin can also be given in percentage by multiplying the profit margin ratio by 100 you get a percentage profit margin of 94.4%.

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