The profit margin is responsible for measuring the profitability of the company’s activities, in percentage. It is calculated using the formula:
Profit Margin (%) = Net Profit / Net Sales (Revenue) x 100%
This formula results in the percentage of net profit, that is, all income minus the costs of producing and selling the company’s products.
In simple terms, the profit of a product, service or of the entire company is the difference between the income obtained from the sales and the costs and expenses that existed in the period.
By knowing all the costs and expenses that he has, an entrepreneur will be able to think about what final price he will sell his products so as not to lose anything.
Considering, for example, that when selling a product, a certain company has a cost of R $ 2.00 and a tax of R $ 0.20 per product sold. So, to make a profit, the product must be sold with a price higher than R $ 2.20 per unit.
If you sell at exactly this price, you are selling at your accounting breakeven point, and if you sell below you have a loss.
So, suppose that this final price is R $ 3.50, with the same total costs of R $ 2.20, we can calculate the net profit margin as follows:
Net income = R $ 3.50 – R $ 2.20 = R $ 1.30
Profit margin = R $ 1.30 / R $ 3.50 x 100% = 37.14%
This value shows the profit margin for the sale of a certain product, but the same applies to the whole company, only considering all the costs and income of all the other products.
Calculation of gross profit margin
It is also possible to measure other values for profit margin, such as gross margin , using the formula:
Gross margin (%) = Net income – Operating costs / Net income x 100%
For the calculation of this margin, only the direct costs of production or acquisition of the suppliers, the goods to be sold, are considered.
In the above example, if we only consider an operating cost of R $ 1.50 and the sale price at the same price of R $ 3.50, then we can calculate the gross margin using the formula:
Gross profit margin = (R $ 3.50 – R $ 1.50) / R $ 3.20 x 100% = 57.14%
This margin has higher values so as not to consider all costs and expenses, that is, it is the profit in the production and sale of a product.