Learn to calculate the profit margin in your business

Are you starting a new business and still do not know how to calculate the profit margin ? The first step is to identify all the fixed and variable expenses of your company. Learn to calculate and analyze the following examples.


What is a utility


The utility is the positive return of the investment originated by the company. In other words, it is the difference between the sale price and all the fixed and variable costs involved in the commercialization and maintenance of the company.


There are two types of profit margin: gross and net


Gross profit margin: this is the price of the product once the direct and indirect manufacturing costs have been deducted. In the case of services, it is what remains of the amount paid for the task after deducting all the costs necessary for its realization.

Net profit margin: is the profit obtained by the company after paying all expenses and tax marketing. In addition to production costs that directly affect the value of the product, you must also pay bills such as rent, water and electricity, bank loans and tax revenues.


How to calculate the utilities


The formula for calculating the gross profit margin is simple: margin = total income - cost of the products or services marketed.

To calculate the percentage margin , the following calculation must be made: percentage gross margin = gross profit / total income x 100.

Let's say that the monthly billing is US $ 20 thousand and you have the following costs directly related to the product: US $ 4 thousand for two employees (including salaries and labor), US $ 6 thousand for materials and US $ 500 of freight and transport.

To calculate the utility you must subtract the summed expenses , that is, US $ 10.5 thousand (US $ 4 thousand + US $ 6 thousand + US $ 500) to US $ 20 thousand (total income). Result: US $ 9.5 thousand. This is your gross profit.

Using the following formula, we obtain the percentage of profit margin: 9500/20000 x 100 = 47.5. Therefore, your percentage of gross profit margin is 47.5%.

Net profit


However, we still do not find the net profit. Add the rest of your fixed and variable expenses . For example: US $ 2 thousand of rent, US $ 2 thousand of taxes + US $ 1 thousand of water, electricity and other expenses. Taking into account the same scenario, you must subtract this US $ 5 thousand to the US $ 9.5 thousand of your gross income, and you get US $ 4.5 thousand.

To calculate the percentage of the net profit margin , the formula is as follows: net margin = gross profit minus expenses and taxes / total income x 100. In this case: 4500/20000 x 100 = 22. 5. Therefore, your percentage of net profit margin is 22.5%.

This means that for every US $ 100 that enters your company's cash, there is a surplus of US $ 22.5 after paying all the costs necessary to manufacture the product, fixed and variable expenses and taxes.

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