How to Calculate Operating Profit Margin by mnmgroup

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```									How to Calculate Operating Profit Margin

Operating profit margin is a way to measure your profitability
before interest and taxes.

If you're running a small business, you need to know how much you are earning versus how
much your business is spending overall. This can be done by calculating profit margins. There
are two kinds: operating profit margin and net profit margin. Both compare your earnings to your
gross sales as a ratio. Operating profit margin is a way to measure your profitability before
interest and taxes.

Difficulty:
Moderate

Instructions
things you'll need:

   Calculator
   Expense sheet

1.
o    1

Gather all your expense paperwork, sales receipts and your gross earnings for the
year.

o    2

Calculate your entire earnings for the year or period you are calculating the ratio
for, excluding the cost of interest and taxes. This will be larger in most cases than
the amount you earned after taxes, which is used to calculate your net profit
margin.
o   3

Calculate your gross sales for the year. This can be done using your company's
bookkeeping software or you can add up all your receipts for service or orders on
a calculator.

o   4

Divide the earnings before taxes by your sales for the year. The formula looks like
this: earnings before taxes and interest/sales = operating profit margin.

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Tips & Warnings
   Expressed as a percentage, operating margin indicates the percentage of each dollar of
revenue that's profit.
   Look at your operating margin over time to determine if your company is growing
profitably.
   Compare your company's operating margin ratio to that of competing businesses in your
industry.
Calculate margin with dollars using the percentage.

There are many different types of margin. The Income Statement is home to Gross Margin,
Operating Margin and Net Income Margin. Cost accountants use Contribution Margin to
understand costs at the individual product level. All of these are calculated as percentages; that
is, a part of a whole. In laymen terms, margin means "percent of sales or profit." While the
number is commonly expressed in profit, it can also be calculated in dollars.

Difficulty:
Moderately Easy

Instructions
things you'll need:

   Calculator or spreadsheet

1.
o    1

Determine the total amount. Margin is taken as a percentage of something else; or
some other dollar amount. The whole dollar amount is usually Total Sales or
Total Revenues. At the product level the whole dollar amount is Product Price or
Product Revenue. Let's say the total amount for this example is \$100,000 in Total
Sales.

o    2

Determine the margin. Margin is usually expressed in a percentage. For instance,
80 percent Gross Margin (Total Sales - Cost of Goods Sold) means 80 percent of
the Sales are left after subtracting the Cost of Goods Sold. A Net Income Margin
of 10 percent (Total Sales - All Costs) means 10 percent of Total Sales were left
after subtracting All Costs. Let's say we know the Gross Margin is 80 percent and
want to know what the dollar value of this margin is given Total Sales.

o   3

Multiply Total Sales by the percentage margin in decimal form for margin dollars.
For instance, \$100,000 x .80 = \$80,000. 80,000 represents the margin in dollar
terms

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