How to Come Up With a Profit Margin Percentage

The profit margin or "bottom line" is perhaps the single most important number in a business' financial records.

A profit margin percentage is a company's net income relative to its overall revenue. This is an important measurement as it helps the company determine the lucrativeness of its business. A company may generate $500 million in revenue but only realize a profit of $5 million, meaning it does not generate a great deal of profit given its substantial sales. A company in such a situation might use the profit margin percentage to evaluate whether cost reductions or price increases are needed.

Instructions

1. Determine gross revenue. Gross revenue is the money generated from all of the company's ordinary courses of business. For example, gross revenue would come from electronics sales for a company such as Best Buy, but would not include capital gains from the sale of buildings and land that once housed a Best Buy retail store.

2. Deduct total expenses from gross revenue. These expenses include not only the costs of the goods sold at the stores but also the wages paid to employees, shipping expenses, rent paid on buildings, interest expenses and taxes. After subtracting all of the relevant expenses from gross revenue, you are left with the company's net income, or profit.

3. Divide net income calculated in Step 2 by the gross revenue calculated in Step 1. For example, if gross revenue was equal to $100 million and net income was equal to $25 million, the profit margin percentage would be equal to $25 million / $100 million = .25, or 25 percent.

References

• "Accounting Coach"; Income Statement
• Financial-Education.com; The Income Statement: Operating versus Non-Operating Components