One of the significant metrics that we often encounter in the marketing world is the Operating Profit Margin. This metric is a measure of profitability and indicates how much of each dollar of revenue is left over after both costs of goods sold (COGS) and operating expenses are considered. In other words, it reveals what proportion of revenue is left over to cover non-operating costs, like interest and taxes, once the regular, necessary costs of business have been paid.
The Operating Profit Margin is not just a number. It is a reflection of a company’s operational efficiency. High operating profit margin means that a company has lower fixed cost and a better gross margin, which gives management more flexibility in determining prices. This is particularly important when the competition is fierce or during economic downturns. On the other hand, a low operating profit margin indicates that a company might be in danger of financial instability.
How to Measure Operating Profit Margin
Measuring your company’s operating profit margin isn’t complex, but it does involve some calculations.
- Calculate Operating profit: Subtract the cost of goods sold (COGS) and operating expenses from the company’s total revenue. This can be represented as: Operating Profit = Total Revenue – COGS – Operating Expenses.
- Calculate Total Revenue: Add up all the income generated by the business, including sales of goods or services, interest on investments, and other sources of income.
- Finally, calculate the Operating Profit Margin: Divide the operating profit by the total revenue and then multiply by 100 to get a percentage. This can be represented as: Operating Profit Margin (%) = (Operating Profit / Total Revenue) x 100.
Both the COGS and operating expenses should be considered while calculating the Operating Profit Margin. Excluding any of these can result in inaccurate results.
Operating Profit Margin Calculator
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