A Quick Guide to Operating Profit Margin

When running a business, you need to keep a close eye on your profit margin. But it’s not a one-size-fits-all term. There are several different profit margins you need to know about, including operating profit margin. But what is it, and how does it differ from gross and net profit?

What is an Operating Profit Margin?

Your operating profit margin measures your business’s profitability by telling you how much profit your business generates from it’s operations, after subtracting operating costs and overhead, such as selling costs, administration expenses, and the cost of goods sold (COGS).

It differs from your gross profit margin because it doesn’t include other income or expenses, such as interest on loans, return on investments or taxes. On the other had, net profit is what’s left of your profit after you’ve deducted all expenses including taxes.

Operating profit is simply working out how much your business is making from its operations, ignoring other financial aspects.

It’s important to know your operating profit margin because it’s a good indication of how efficient your business is. A high margin means you’re generating a lot of profit form your operations and your business is running smoothly. A low margin could mean you’re not selling enough or that your operating expenses are too high.

How to Calculate Operating Profit Margin

The first step in working out your operating profit margin is to calculate your operating profit. To do this, you need to know your business’s total revenue and cost of sales, as well as its operating expenses; These include things like rent, wages, utilities and insurance.

Once you have this information, you can calculate your operating profit by deducting your cost of sales and operating expenses from your total revenue.

For example, let’s say your business had total revenue of £100,000 last year. Your cost of goods sold was £50,000 and operating expenses were £30,000. This would give you an operating profit of £20,000.

Next, to calculate your margin, you then divide your operating profit by your total revenue and multiply by 100. In this example, your operating profit margin would be 20%.

In summary, the formula for working out your operating margin is:

Operating Profit ÷ Total Revenue x 100 = Operating Profit Margin %

Comparisons

It can be very helpful to compare your operating profit margin against your gross and net profit margins. Your operating margin will usually be lower than your gross profit margin because it doesn’t include other forms of income, such as interest or investments.

However, it should be higher than your net profit margin because it doesn’t take into account all expenses, including taxes.

If your operating margin is lower than both your gross and net margins, it could be a sign that your business is inefficient or that your operating expenses are too high. You should also compare your operating profit margin year-on-year, because a decline could indicate that your business is becoming less profitable.

What Causes Gross Profit Margin to Increase?

There are a few different things that can cause your operating profit margin to increase. If your business’s revenue increases but the cost of sales and operating expenses stay the same, then your margin will increase.

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By reading this guide you will discover:

  • The true value of your time and energy
  • Premium pricing strategies that work 
  • How to lockdown your ideal customers

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