Margin is a term for the percentage of profit that comes from selling products or services. Margin is very important for companies because it can be used to measure business, financial and investment profits. Through the results of the profit margin percentage in one period, the company can manage financial management for the next period well.
For those of you who are curious about what margin is, let's find out the definition, function and types of how to calculate it below.
1. Definition of Margin
There are two definitions of margin that you can know, namely in the world of business and investment.
In the business world, margin is the percentage of profit earned by a company. From the definition, you can see that margin is closely related to profit, which is known as net profit margin.
Net profit margin itself is a ratio between company profits and the entire amount of money the company generates.
If you know the net profit margin, you can find out whether the company is running effectively or not. If the ratio gets bigger, it means the company's performance can be said to be productive.
Meanwhile, in the world of investment, margin is a broker's facility for investors to be able to purchase shares or other investment instruments using more capital than they have. This facility is known as margin trading which consists of two types, namely margin call and margin account.
A margin call is a notification service provided by a broker to investors when the investment value falls to a certain level. This notification will provide a warning so that investors add capital to their securities account so that they do not suffer losses later.
Then, margin account is a term to refer to an account from a broker that can be used to lend money to investors so they can buy shares, bonds or other investment instruments.
2. Margin Function
Margin functions as an appropriate decision maker while also being able to increase business profitability. Of course, margins are very important for businesses and companies so that they continue to grow and obtain profits as desired by the company.
Apart from that, there are still several margin functions that you should know, including:
2.1 Measuring Profits
The first function of margin is to help businesses determine the amount of profit generated from each sale. Through margin analysis, companies are able to identify products or services with high profit margins. In fact, you can focus on products and services to maximize sales.
Apart from that, companies can also identify products with low margins so they can adjust prices and costs and stop production and sales.
2.2 Determine the Product Selling Price
If you are able to know the profit margin, it will be easier for you to set the right selling price for a product. Therefore, the products you sell can compete well in the market.
If a business does not have a projected margin, then the price of the product offered will be less appropriate. Therefore, make sure you know the margin first so you can determine the price correctly.
2.3 Determine the Number of Products or Services
Margin can function to determine the number of products or services by calculating the projected margin for the products or services you will sell. The goal is to get projected margins that don't skyrocket, so you can minimize the impact of losses from the business you are managing.
2.4 Cost Control
Margin functions to control costs for production needs so that it does not result in losses. You can control these costs by controlling direct and indirect costs more efficiently according to your own company's needs.
2.5 Determining Marketing Strategy
The next margin function is often a reference for determining marketing strategies. As previously explained, margin can determine the selling price of a product appropriately and provide profits for your business.
Apart from that, high profit margins will make companies allocate more funds for promotional needs, whether through social media, marketplaces or offline.
In fact, good margins can fund new product development in order to increase sales. Therefore, margin has an important function for marketing strategies so that the products you offer to target consumers can be sold according to or exceed the specified targets.
2.6 As a Means of Evaluating Company Performance
Apart from that, another function of margin is that it is used as a means of evaluating company performance from various aspects, such as efficiency, profitability and competitive ability.
From an efficiency aspect, a high profit margin shows that your business is able to manage production and operational costs well. Then, in terms of profitability, a high profit margin shows that your company has succeeded in obtaining appropriate profits from product sales. Then, from the aspect of competitive ability, it can be seen that your company has quite a competitive advantage.
If your company's margin is low, then you can evaluate its performance and plan a more appropriate strategy so that the company can operate well again.
3. Types of Margin
There are 4 types of margin that you should know, namely gross profit margin, net profit margin, operating profit margin and contribution margin.
In order to better understand each type of margin, you can read the following review.
3.1 Gross Profit Margin (Gross Profit Margin)
Gross profit margin is a type of margin to measure profitability by calculating the difference between revenue from sales and COGS. This margin will show how efficiently the company is able to produce or obtain its products or services.
The formula for calculating gross profit margin is:
Gross Profit Margin = (Revenue - COGS (Cost of Goods Sold)) / Revenue x 100
3.2 Operating Profit Margin
Operating Profit Margin or business profit margin is used to measure the company's ongoing operational profits. One of them is operational costs, such as salaries, utilities, building rental and marketing costs.
Operating profit margin will provide information about the company's ability to generate profits through daily activities.
The formula for calculating business profit margin is:
Operating Profit Margin = Operating Income / Revenue x 100
3.3 Net Profit Margin (Net Profit Margin)
Next there is the net profit margin (Net Profit Margin) which is useful for measuring a company's overall profitability or profit by considering all costs, including interest and taxes, in addition to operational costs.
To find out the net profit margin calculation, you can use the following formula:
Net Profit Margin = Revenue / Net Income x 100
3.4 Contribution Margin
Contribution margin is the value of net income after deducting variable costs. So, when you make a product or provide a service and charge variable costs, such as shipping costs or packaging costs, the remaining value is called contribution margin.
The purpose of calculating contribution margin is to find out how far income from sales can cover fixed costs after removing variable costs.
Of course, contribution margin is an important element or tool that must be known by management, financial analysts and investors. By knowing and understanding it, you can make your business operate effectively and efficiently while minimizing the risk of losses occurring in the future.
The formula that you can use to calculate contribution margin is:
Contribution Margin = Net Income - Variable Costs
4. How to Calculate Margin
Each type of margin has a different calculation method. Instead of being curious, let's just learn the following methods.
4.1 How to Calculate Gross Profit Margin
The following is an example for calculating gross profit margin:
A is a businessman who produces shoes with a selling price for a pair of shoes of IDR 500,000. The manufacturing process costs up to IDR 230,000. So, what gross profit margin does A earn?
Answer:
Gross Profit Margin = (Revenue - COGS (Cost of Goods Sold)) / Revenue x 100
= (IDR 500,000 - IDR 230,000) / IDR 500,000 x 100
= IDR 270,000 / IDR 500,000 x 100
= 54%
So, the gross profit margin for these shoes is 50%.
4.2 Calculating Operating Profit Margin
If you want to know how to calculate business profit margin, then consider the following example:
In the XYZ company report as of December 31 2020, it is known that its net sales were IDR 45,000,000. Then, the amount of profit before being subject to income tax is IDR 8,000,000.
So, the operating profit margin of company XYZ in 2020 is:
Operating Profit Margin = Operating Income / Revenue x 100
= IDR 8,000,000 / IDR 45,000,000 x 100
= 17.7%
So, the operating profit margin or business profit margin obtained by company XYZ as of 2020 is 17.7%.
4.3 Calculating Net Profit Margin (Net Profit Margin)
To find out how to calculate the net profit margin, just look at the following example.
Company ABC earned total sales of IDR 250,000,000 with COGS of IDR 25,000,000 and operational costs of IDR 55,000,000. The tax imposed and the company must pay is IDR 5,000,000. Meanwhile, other costs incurred for promotional needs are IDR 6,000,000. So, what is company ABC's net profit margin?
How to calculate:
Income = IDR 250,000,000 - IDR 25,000,000 - IDR 55,000,000 - IDR 5,000,000 - IDR 6,000,000
= IDR 159,000,000
Net Profit Margin = Revenue / Net Income x 100
= IDR 159,000,000 / IDR 250,000,000 x 100
= 63.6%
So, the net profit margin that ABC company gets is 63.6%.
4.4 How to Calculate Contribution Margin
Finally, to find out how to calculate contribution margin, you can see the following example:
A manufacturing company called PT X
- Goods Transport Costs = IDR 6,000,000
- Costs for Direct Labor = IDR 23,000,000
- Costs for Direct Raw Materials = IDR 35,000,000
So, the total variable costs of PT X are IDR 64,000,000
When included in the contribution margin formula, the results are:
Contribution Margin = Net Income - Variable Costs
= IDR 200,000,000 - IDR 64,000,000
= IDR 136,000,000
So, PT X's contribution margin is IDR 136,000,000.
The net income value can still be reduced by fixed costs to find out whether the contribution margin is positive or negative.
For example, if PT
So, PT X can still cover fixed costs after net income is deducted from variable costs incurred. Apart from that, you can still narrow this calculation down to a contribution margin per unit using a formula that is not much different, namely:
Contribution Margin/Unit = Product Selling Price/unit - Variable Cost/unit
Example:
If the price of one product sold by PT
So, you can see that the contribution margin per unit of PT X is IDR 14,000.
5. Things to Pay Attention to in Margin Calculation
From the calculations above, you can see that calculating the types of margin is quite easy, right?
Even so, there are several things you must pay attention to when calculating margin, namely:
5.1 Revenue
Revenue is the total sales of products or services in a certain period. Make sure you record all sales, including cash sales, credit, discounts and rebates.
To avoid errors when calculating, you must use a neat and accurate recording system. With neat and accurate recording, the margin calculation process can get precise results without any problems.
5.2 Cost of Goods Sold
Cost of goods sold or abbreviated as HPP is the direct costs that a company incurs to produce or purchase products or services to be sold.
The costs included in the Cost of Goods Sold (HPP) are raw materials, labor wages, factory overhead costs and the costs of purchasing products and services from other parties.
5.3 Gross Profit
Gross profit is the difference between the company's revenue and COGS. Gross profit will show the company's ability to cover direct costs related to the production or purchase of products and services.
It is important for you to pay attention to the three things above, especially when you want to calculate margin. Make sure to always update revenue and COGS data regularly to get the latest picture regarding your company's profitability.
Apart from that, to make the process of calculating margins accurately easier, you can use accounting software. So, you don't need to take a long time to calculate manually. With accounting software, you can complete the margin calculation process quickly.
Lastly, make sure you analyze margin trends over time periodically to find out whether there are significant changes or not. If you experience a decline, you must create a more optimal marketing strategy so you can increase sales. However, if it continues to increase, then the strategy you created has been successful and make sure you maintain it so that it continues to grow rapidly.
So, from the explanation above, you now know that margin is the difference between the selling price and the costs incurred for producing or obtaining a product and service, expressed in percentage form. Of course, it is important for you to learn margin calculations so you can determine the profit from every sale you make in your business.
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