The meaning of profit margin is the difference between the selling price of a product or service, without taking into account VAT, and the operating costs or purchasing an item.
Types of profit margin
There is the possibility of calculating different margins based on the costs charged to the product:
- Gross margin: it is the difference between the marketing price of a service or good (without IVA) and the purchase price of that item. This gross margin, which is usually unitary, assumes a profit margin before taxes.
- Net Margin: Assumes the profit margin after taxes. This implies the unit gross margin taking into account the taxes that are passed on that good or service. In both cases, it is usually expressed in monetary units / commercialized unit.
In the profit margin, a couple of concepts that are essential for the economy of any company must be taken into account, such as costes and income. The first refers to the value or capital that the members of the company must provide to carry out their economic or commercial activity, which may be the purchase of material, payment of salaries and other routine expenses. On the other hand, the income chapter includes the inflows of money as a result of the development of an activity.
In a simple way, it can therefore be said that the definition of profit margin is the positive difference that an organization expects to achieve, once total costs are subtracted from total revenues, always within an accounting period. In most entities, the time reference is one year, although depending on your needs it can also be quarterly or half-yearly.
To calculate the profit margin we must perform a series of very simple operations. The formula for profit margin equals revenue minus costs. In the case of the net margin, it will be the income minus the production costs and taxes.
Calculator for profit margin