A profit margin is a difference between buying and selling, i.e. how much you bought for, against how much you sold for. However, you also need to add in the costs of selling and the costs of running your business. That is why working out your profit is often tricky. That is why many small businesses use a margin calculator to work out their profit margins.
A Simple Margin Calculator Example
Let’s say you are living and working in your granny’s basement, so you have no overheads. You have no bills of any sort. Let’s also say that you are trading in currency. You buy and sell currency.
It is easy to work out your profit because you do not have overhead bills to pay, plus your stock never gets stolen, worn out, etc. All you have to worry about is buying price and selling price. That is all you need to work out.
Let’s say you have a margin calculator, and you buy $100 worth of Euros. A month later, the Euros you bought are worth $120, so you sell. The margin calculated would show a profit of $20.
In reality, you would need a forex calculator. This is because your $100 would buy around 90 Euros. The cost of euros and dollars changes on a daily basis. Your forex calculator would calculate how much you spent, what your currencies were worth, what they are worth now, and then calculate the profit. It is a slightly more advanced margin calculator.
How Do You Calculate Margin?
You use a margin calculator to figure out your gross margin, your profit margin, and to help you determine your pricing strategy.
The formula to use is:
- (Net Profit / Total Revenue) x 100
- Your revenue is the amount you received in total.
- Your net profit is worked out in the section below.
How to Work Out Net Profit
Work out your profit so that you may enter it into your margin calculator. Take all the money you made and write it down. Now, take all the money you spent. Not just the money you spent on the stock, but the money you spent on business bills. This also includes taxes, fees, transport, and so forth.
Take the first number (the money coming in) and subtract the amount you spent (the money going out), and you should be left with a figure. The figure you are left with is your net profit.
Let’s say you earn $100. You spend $30 on the stock, $10 on bills, and $10 on taxes. The total you spent was $50, and the total you have leftover is $50, and that is your net profit.
How Do You Calculate 30% Margin?
You can use a calculator to figure out your 30% margin. Or, you can use the margin calculations from earlier, but decide to price the goods cost you by 0.7.
Taking the example from earlier: You spend $30 on the stock, $10 on bills, and $10 on taxes. That is a total cost of $50. To make a 30% profit on that amount, you divide it by 0.7. SO, $50/0.7 = $71.43. If you sell the item at $71.43, you will receive a profit of 30%.
What Is the Difference Between Markup and Margin?
The difference between markup and margin is that margin is sales minus the cost of goods sold. You have an amount of money you made, you take off the money you spent, and there is your margin.
A markup is more of a number you apply to help you pick a selling price. It is where you take the cost of the product, and then add a percentage. For example, jewellers take their product, and add 100% to the price, and then sell it in their stores.
How Do You Calculate Selling Price and Margin
You take the total amount of your product costs. You decide which profit margin you would like. After doing so, you then use a calculator to figure out your selling price.
For example, if you buy a gold chain for $100, and you have bills and taxes that come to $100, then the total cost of selling your chain was $200. Now, let’s say you want to make 100% profit. You would have to sell for $400. That way, when you take off your $200 in costs, you have a $200 net profit. However, in this case, the margin is only 50%.
It is easy to be confused by the terms margin, markup and profit (gross and net) but follows the simple guidelines above using a margin calculator and you will have a handle on your business’s finances and profitability.