Profit margin calculator

How do you calculate profit margin?

Divide profit by revenue and multiply by 100: profit margin = profit / revenue x 100. The answer is the share of every sale that the business keeps as profit. A shop with £80,000 of sales and £68,000 of costs makes £12,000, and £12,000 / £80,000 x 100 = 15%, so it keeps 15p of each pound it takes.

Which profit goes on top of the fraction decides which margin you get. Take off only the direct cost of what was sold and you have the gross margin; take off running costs as well and you have the operating margin; take off interest and tax too and you have the net margin. Revenue at the bottom always means sales excluding any sales tax or VAT collected.

Gross, operating and net profit margin: what is the difference?

Each margin stops at a different line of the income statement. The calculator opens on a business with $500,000 of revenue:

The gross margin shows pricing against direct costs. The operating margin shows how much of that survives overheads, so it measures the business before any choice about how it is financed. The net margin is what is left for shareholders. The gaps between them point to where profit goes; our post on what the gap between operating and net margin tells you reads that gap in more depth.

Worked example: margins from a set of accounts, laid out for an exam

An answer to a margin question normally shows each profit figure, the division, and the percentage to one or two decimals. Here is a business reporting in euros, with revenue of €1,200,000, cost of sales of €780,000, operating expenses of €264,000, finance costs of €18,000 and tax of €34,500:

• Gross profit = €1,200,000 - €780,000 = €420,000. Gross margin = €420,000 / €1,200,000 x 100 = 35%.
• Operating profit = €420,000 - €264,000 = €156,000. Operating margin = 13%.
• Profit before tax = €156,000 - €18,000 = €138,000. Pre-tax margin = 11.5%.
• Profit for the year = €138,000 - €34,500 = €103,500. Net margin = 8.625%, or 8.63% to two decimals.

The tax charge here is exactly 25% of profit before tax. Enter the same figures with the currency set to EUR and the calculator returns each line, and the common-size statement under the result shows every cost as a share of revenue.

Is profit margin the same as markup?

No, and confusing the two is one of the most common pricing errors. Both start from the same profit, but margin divides it by the selling price while markup divides it by the cost. On the default figures, gross profit of $200,000 is a 40% margin on $500,000 of revenue but a 66.67% markup on $300,000 of cost of sales. Because cost is always smaller than price when there is a profit, markup is always the larger percentage.

To go from one to the other: margin = markup / (1 + markup), and markup = margin / (1 - margin), with both as decimals. Setting prices from a cost, or turning a target margin into a markup, is what the markup calculator does, with a conversion table.

How do you calculate profit margin in Excel or Google Sheets?

With revenue in B1 and the profit figure in B2, the margin is =B2/B1, formatted as a percentage. To build the margins straight from costs, put revenue in B1 and cost of sales in B2:

• Gross margin: =(B1-B2)/B1, which returns 40% for the default figures.
• Operating margin, with operating expenses in B3: =(B1-B2-B3)/B1, which returns 16%.
• To avoid a #DIV/0! error on an empty row: =IF(B1=0,"",(B1-B2)/B1).

For a common-size statement, divide every line by the revenue cell with an absolute reference, such as =B2/$B$1, and fill down. Google Sheets uses the same formulas. Keep the values as decimals and use the percentage format, rather than multiplying by 100, so the results can be used in later formulas.

Which costs go where, and do reporting rules change the margins?

Margins depend on how costs are classified, and that is a matter of accounting rules as well as arithmetic. Companies reporting under IFRS have long had freedom in which subtotals to show. That changes with IFRS 18, Presentation and Disclosure in Financial Statements, which replaces IAS 1 and is effective for annual reporting periods beginning on or after 1 January 2027, with earlier use permitted. It requires two defined subtotals in the statement of profit or loss: operating profit, and profit before financing and income taxes. Operating margins of IFRS reporters should therefore become easier to compare from 2027 reports onward.

Tax collected on sales is never revenue. In the UK the standard VAT rate is 20%, so a till total of £96,000 including standard-rated VAT is £80,000 of revenue. In the UAE VAT is 5%. Use net sales in every margin, and leave out VAT that the business can reclaim on its costs as well.

How do changes in revenue and costs move each margin?

Costs that do not move with sales make margins swing harder than revenue does. On the default figures, suppose revenue rises 10% to $550,000 while every cost stays where it was. The gross margin rises to 45.45%, but net profit almost doubles to $102,500 and the net margin goes from 10.5% to 18.64%. In practice cost of sales rises with volume and tax rises with profit, so the real change is smaller, but the direction holds: the more of a business's costs are fixed, the more its lower margins move.

The reverse works the same way. A small fall in sales against fixed overheads can take an operating margin from positive to negative while the gross margin barely changes. When that happens the calculator flags that the loss arises below gross profit.

Common profit margin mistakes

• Dividing by cost instead of revenue. That gives markup, not margin.
• Including sales tax or VAT in revenue. The tax then flows into every profit line as well, so every margin comes out too high.
• Comparing a pre-tax margin with someone else's after-tax margin. Say which profit you mean; this page calls profit for the year the net margin and shows the pre-tax margin separately.
• Comparing gross margins across businesses that classify costs differently. One may put delivery in cost of sales and another in distribution costs.
• Reading a margin without the amount. A 30% margin on small sales can be far less profit than 8% on large ones.
• Averaging percentages. Work out the total profit and total revenue, then divide, rather than averaging the margins of separate products.

What the profit margin calculator leaves out, and a glossary

The calculator works on the figures you enter for one period. It does not classify costs for you, adjust for one-off items, or tell you what margin a business of your kind earns, since that varies widely by industry and over time. It also treats the tax figure as given rather than working it out from a rate. For pricing a single product, the break-even calculator shows how many sales it takes before any margin appears.

Revenue: income from sales, net of sales tax and discounts. Cost of sales: the direct cost of the goods or services sold. Gross profit: revenue minus cost of sales. Operating profit: gross profit minus operating expenses. Profit for the year: profit after finance costs and tax. Common-size statement: an income statement with every line shown as a percentage of revenue.

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