Running a business, whether big or small, requires you to keep track of your expenses, income, and profit. Such figures will tell you whether your business is doing well. Every successful business also uses such figures to make changes to operations, as well as for planning for expansion or some other major modification to the business.
The operating profit margin is actually the ratio of the operating income to sales. It is used to assess the company's profitability without taking into account interest and taxes yet. But, before you can calculate your business' operating profit margin, you must calculate the operating income (also known as operating profit) first. Thus, calculating the operating profit margin (or operating margin) requires two steps: determining the operating income, and then determining the operating margin. Read the rest of this article for the steps on how to calculate these two items.
- To calculate your operating income, you need to determine how much in total you have earned. This is also known as gross profit. You can determine your gross profit by examining your total earnings for a particular period (but do not deduct the expenses, interest, or taxes yet).
- Once you have calculated your gross profit, your next step is to calculate your operating expenses (except the interests and taxes) for the same period. Operating expenses refer to those expenses that the business needs to incur in order to smoothly run or operate the business.
- At this point, you already have two values: gross profit and operating expenses. To calculate the operating income or operating profit, simply subtract your operating expenses from your gross profit. This is actually somewhat intuitive: total earnings minus expenses. When you subtract the expenses from the total income, all that's left is profit, specifically, the operating profit.
- Now you're ready to compute your operating profit margin. As has been mentioned, this is the ratio of the operating income to sales. So, to complete this step, you need to calculate your total sales for the particular period first. You can compute your gross sales for a period by manually summing all sales receipts or by using a calculator. You can also use your bookkeeping or accounting software, if your company uses one.
- To calculate the operating profit margin, simply divide the operating income by the sales. Then, multiply the answer by 100 in order to express the value in percent. The result is your operating margin, expressed in percent. What does that mean? The operating margin simply tells you how much profit you gain for every dollar that comes in.
Although the operating margin alone is not the only useful measure of a company's growth and profitability, it is a very useful indicator nevertheless. If you monitor your company's operating margin over a long period, you can actually see trends and patterns about whether your company has been profitably growing or not. You may even use the ratio (i.e., operating margin) to compare your own company's performance with competing companies in the same industry. Hopefully, the tips discussed in this article will be able to help you accomplish that.