Three margins, three questions
A profit and loss statement has several profit lines, and each one has its own margin. They answer different questions, so it's worth knowing all three.
Gross profit margin
Revenue minus the cost of the goods you sold, divided by revenue. It tells you whether your prices cover what you sell with room to spare.
gross margin = (revenue − cost of goods) ÷ revenue × 100
Operating profit margin
Take gross profit and subtract the costs of running the business: rent, wages, software, marketing, depreciation. It shows whether the business makes money from what it actually does, before financing and tax.
operating margin = (gross profit − operating expenses) ÷ revenue × 100
Net profit margin
The bottom line. Subtract interest and tax as well, and you get the share of each sale you really keep.
net margin = net profit ÷ revenue × 100
A worked example
A small online shop sells $120,000 in a year. The products cost $66,000, running costs come to $38,000, interest is $2,000 and tax is $3,000.
| Line | Amount | Margin |
|---|---|---|
| Revenue | $120,000 | |
| Gross profit | $54,000 | 45% |
| Operating profit | $16,000 | 13.3% |
| Net profit | $11,000 | 9.2% |
A 45% gross margin looks healthy, but running costs take most of it. That's the pattern to look for: if gross margin is fine and net margin is thin, the problem is overheads, not pricing.
Using it month to month
Margins swing with the seasons, so one month tells you little. Run the numbers for the same period each year, or for a rolling twelve months, and download each result as CSV to keep a simple history.