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Margin is the base for any business. It is a metric that helps to understand how the business is running. No organization or business would run without making use of margins. A good margin is an indicator of a progressive business. In this article, let us understand the importance of margin, the terms associated and the calculations involved.
Terms and Definitions related to margins are:
- The term ‘cost’ has many meanings based on the context. Since we are dealing with respect to business and business owners, cost means the total expenditure a business owner spends on making a product.
- This would include the cost of raw materials, transport expenses, machinery, and related items, staff salary and other expenditures.
RevenueThis is the total amount of input into your business. This includes total sales, investments and other streams of income that is being inputted into your business.
ProfitThis is the difference between the cost involved and the revenue obtained after selling a product.
MarginMargin is a percentage that defines your profit. You add margin percentage to the total cost, and the result is your final selling price of the product.
Know your margins. Then, focus on growing your business. – Ehab Atalla
Margin and its Importance
Deciding the margin percentage is a key to any business. It is one of the essential skills a business owner needs to know.
If the margin is too less, the business cannot make profits and continue for long overcoming all the hurdles and expenses incurred.
If the margin is too high, the customers may feel that the product is over-priced and may not be keen on the purchase. This, too, will affect sales and bring the business down.
Types of Margin
Depending on how the margin percentage is being marked, there are two types of margins.
- Gross Margin If you don’t count the expenses incurred such as transport and salaries of employees and note the difference between the wholesale cost and selling cost, then that would be a Gross Margin.
- Net Margin
After calculating all the expenses and the costs involved, if you frame a margin percentage, it is called the Net margin.
Net margin is recommended than gross margin as it benefits the business owners.
Steps for Calculating Margin
- Calculate your net income. You can get this by subtracting the total expenses from your revenue.
- Divide the net income with the revenue.
- Multiply the answer by 100. This is your margin percentage.
Factors that Affect Margin
Businesses will have to consider many factors before deciding their margin. Here is a list that includes some such important factors:
- The cost incurred on customer service
- Marketing and advertising
- Transport and logistics
- Cost of raw materials
- Market base and product demand
How to use Calculator Hut’s Margin Calculator?
Calculator Hut’s margin calculator allows you to find the revenue and profit that you want to calculate for a given margin percentage.
You can also conveniently add our margin calculator widget to your website and make calculations instantly. Just let us know your preferred customizations at firstname.lastname@example.org, and we would design an attractive and colorful widget as per your taste. And this is all for FREE!!
Concentration and Mental Toughness are the margins of Victory. – Bill Russell