   Knowing your company’s profits and profit margins is critical for success. The goal of all businesses is for its bottom line to show a profit so it can continue to grow and increase profits for the next year. Here is a simple guide on how to calculate your business profit margin.

### What is a Profit Margin?

A profit margin is the percentage of sales revenue which the company keeps after deducting the costs to run the business. These costs fall into two categories – the cost of goods sold and operating expenses. However, there are more than two types of profit margins to consider.

### Types of Profit Margins

Generally, there are three types of profit margins: gross, operating and net. Each one can be calculated by dividing the profit (revenue minus costs) by the revenue, then multiplying that figure by 100 to get your profit margin percentage. Let’s look at each type of profit and the costs that figure into its calculation.

### How to Calculate Gross Profit

Gross profit margin shows your profit percentage over your production costs. In other words, your gross profit represents the total revenue from your sales minus the cost of goods sold. Your cost of goods sold include all your costs to produce the product, including materials, labor and more.

Using the gross profit formula, let’s say you made \$500,000 in total revenue from selling 10,000 products. However, it costs you \$200,000 to produce those products. In this case, the gross profit calculation would be \$500,000 – 200,000 = \$300,000.

Divide that figure by total revenue to get your gross profit percentage: \$300,000/\$500,000 = 0.60 or 60%. Therefore, your gross profit margin would be 60 percent.

### How to Calculate Operating Profit

To calculate your operating profit using the gross profit figure above, let’s say your total operating expenses are \$100,000. The formula to use would be \$300,000 - \$100,000 = \$200,000 in operation profit, which is also considered your pre-tax profit. Divide that figure by total revenue (\$200,000/\$500,000), and you get 0.40 or a 40% operating profit margin.

### How to Calculate Net Profit Margin

The overall profitability of a business is indicated by its net profit, which factors in even more deductions from revenue. Net profit equals total revenue minus cost of goods sold, operating expenses, as well as taxes and interests.

Using the previous scenario with total revenue of \$500,000, after subtracting cost of goods sold (\$200,000) and operating expenses (\$100,000), you’re left with \$200,000, which was your operating profit. If you paid \$50,000 in taxes and interest and subtract that amount, you're left with \$150,000, which is your net profit. The net profit margin would be \$150,000/\$500,000 which equals 0.30 or 30%.

### Profit Margin Formulas

To make these calculations easier to digest, below is a simple breakdown of each profit margin formula:

1. Gross Profit Margin = Gross Profit/Revenue x 100
2. Operating Profit Margin = Operating Profit/Revenue x 100
3. Net Profit Margin = Net Income/Revenue x 100

### What is Considered a Good Profit Margin?

You may be wondering what a preferable profit margin would be. Favorable profit margins vary considerably by industry, but generally, a 10% net profit margin is considered average, a 20% margin is deemed to be high (or good), and a 5% margin is low. But these guidelines vary by types of business and are impacted by several other factors.