When discussing accounting and business, the function of margin is often associated with profit. Simply put, margin is the difference between revenue earned and product costs, used to measure profit potential.
This concept is often applied to manage investment and business risks, including determining potential profit expectations. This is why business owners need to understand margin thoroughly.
What is Margin?
So, margin can actually be understood from two different perspectives: investment and accounting. From an accounting and business perspective, margin is the percentage of profit a company earns based on the sale of products or services, using its capital.
Meanwhile, from an investment perspective, margin is more popularly known as margin trading, which is a form of loan originating from a broker for the purpose of purchasing shares in quantities larger than the funds available.
In the investment sector, there are two types of margins: a margin account, which is an account provided by a broker to investors for borrowing funds, and a margin call, which is a loan to cover potential large investment risks.
Margin Function
To ensure optimal business performance, understanding margins is crucial for every entrepreneur. Here are the benefits margin can provide to a company:
- Knowing how many products or what to market according to the predicted margin.
- Analyze the appropriate product and service marketing methods according to the size of the margin obtained.
- Ensure pricing for each product and service to reduce potential losses.
- Projecting company profits so that business expansion strategies can be created.
- Knowing the progress of profits or benefits obtained as material for evaluation and improvement.
Types of Margin
Beyond understanding the definition and function of margin, you also need to understand the types of margins in business. Common types of profit margins include:
- Net profit margin is the difference between profit and income tax after deducting taxes. The higher the value, the better the company’s financial condition.
- Gross profit margin is the remaining revenue after deducting production costs. The higher the value, the greater the company’s return on capital.
- The operating profit margin is the difference between sales figures after deducting all operating expenses. This margin’s function is to determine the likelihood and effectiveness of business risk management over a specific period. Investors can also use this margin to compare competitors’ profits.
How to Calculate Margin
You should know that each type of margin has a different calculation formula. Therefore, to calculate margin correctly, you must first understand the formula for each type of margin. Here’s an explanation:
1. How to calculate net profit margin
To calculate the net profit margin, you can use the formula:
Net Profit Margin = ((Income – COGS – Taxes – Operating Costs – Other Costs) / Income) x 100%.
You can find out more details about calculating net profit margins based on the following example.
For example, PT. OON has revenue of Rp25 million, with a COGS of Rp5 million, operating costs of Rp4 million, taxes of Rp2 million, and other costs of Rp1 million. Based on this data, the company’s net profit margin is:
Net Profit Margin = ((Revenue – COGS – Taxes – Operating Costs – Other Costs) / Revenue) x 100%
= ((Rp. 25,000,000 – Rp. 5,000,000 – Rp. 4,000,000 – Rp. 2,000,000 – Rp. 1,000,000) / Rp. 25,000,000) x 100%
= 0.52 x 100%
= 52%
2. How to calculate gross profit margin
After getting the margin figure for net profit, you can also get the gross profit margin with the formula:
Gross Profit Margin = ((Revenue – COGS) / (Revenue)) x 100%
You can understand the calculation of gross profit margin in more detail based on the following example.
For example, PT ZVT wants to sell a product for Rp100,000. The COGS used is Rp50,000. Based on this data, the company’s gross profit margin is:
Gross Profit Margin = ((Revenue – COGS) / (Revenue)) x 100%
= ((Rp100.000 – Rp50.000) / (Rp100.000)) x 100%
= 0,5 x 100%
= 50%
3. How to calculate operational profit margin
Finally, calculating the company’s operational profit margin can be obtained using the formula:
Operating Profit Margin = ((Income – Administrative Costs – COGS) / (Income)) x 100%
You can understand the calculation of a company’s operational profit margin in more detail based on the following example.
PT KIO earned a total revenue of Rp500,000,000 and a COGS of Rp150,000,000. Then, there were administrative costs of Rp40,000,000. Based on this data, the company’s operating profit margin can be calculated using the following formula:
Operating Profit Margin = ((Income – Administrative Costs – COGS) / (Income)) x 100%
= ((Rp500.000.000 – Rp40.000.000 – Rp150.000.000) / (Rp500.000.000)) x 100%
= 0,62 x 100%
= 62%.
Important Things Before Calculating Margin
Before calculating margins, here are some things you need to pay attention to:
- Ketahui komponen utama menghitung margin. The principal components are essential elements you must understand before calculating margin. There are two main components of margin: expenses and revenue. Expenses are the total costs incurred by a company to generate revenue, while revenue is the increase in assets or value that increases capital.
- Identify the total costs for production. Record all production costs for each product in detail. This includes both fixed and variable costs.
- Prepare a profit and loss statement. Creating this report is useful for knowing the company’s income and expenses for a period.
- Calculate all costs of COGS components. Cost of Goods Sold (COGS) is the total costs incurred by a company related to the production process.
- Calculate net cost of sales. This cost can be obtained from total gross sales minus commissions, discounts, and returned goods.
That explains the function of margin and how to calculate it. Ensure your business runs optimally by maximizing its operations. You can do this by utilizing the Labamu app. Features like
