How to Work Out Your Profit Margin

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Profit margins are one factor in determining how successful your company is.
Profit margins are one factor in determining how successful your company is. (Image: Photos.com/Photos.com/Getty Images)

While all business owners want to make a profit on every product they sell, it is not always possible. You may buy some items for resale thinking that customers are going to buy the items quickly, only to find out that the item is not selling at all. In addition, some items you did not think would sell, you cannot keep in stock. Knowing your profit margins on the items you sell allows you to determine what price you can set on each item to remove slow sellers from inventory while maintaining profitability.

Things You'll Need

  • Invoice
  • Your price list
  • Calculator

Look at your invoice to determine how much you paid for an item. For example, if you bought a case of widgets for $27, that is the cost.

Divide the cost of the case by the number of single items in the case. For example, if the case of widgets contains 12 individual widgets, divide $27 by 12 to determine that each individual widget cost you $2.25.

Look at your price list to see how much you charge for the item.

Subtract the cost of the item from your price for the item. For example, if your price for a widget is $3, your profit margin on widgets is $0.50 each.

Multiply your profit margin by the number of items in the case to determine your amount of profit by the case. For example, $0.50 times 12 equals a profit margin of $6 per case.

Tips & Warnings

  • Profit margin differs from gross margin percent. The gross margin is a percentage that shows you the profit compared to the selling price. You can determine your gross margin percent by dividing your profit margin by your selling price. For example, $0.50 divided by $2.50 equals a gross margin of 20 percent.
  • If an item is not selling, you may have to set a price that requires you take a loss to get it out of your inventory.

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