Profit Margin

Definition

Profit margin is the amount by which revenue from sales exceeds costs in a business.

Purpose

The purpose of calculating profit margin is to determine the profitability of a business by showing the percentage of revenue that exceeds the costs involved in producing goods or services.

Examples of Use

• Retailers use profit margin to assess the profitability of their product lines.
• Service providers calculate profit margin to ensure that their pricing covers all operational costs and generates profit.
• Investors analyze profit margins to evaluate the financial health of companies.

Related Terms

• Gross Profit Margin: The difference between sales and the cost of goods sold divided by revenue, expressed as a percentage.
• Net Profit Margin: The percentage of revenue left after all expenses have been deducted from sales.
• Operating Margin: The percentage of revenue left after deducting operating expenses.

Notes

Maintaining a healthy profit margin is crucial for the sustainability and growth of a business. It helps in setting competitive pricing strategies and managing costs effectively.