Questions · Business calculations
How do you calculate profit margin?
The answer
Profit margin is profit as a share of the selling price: (selling price − cost) ÷ selling price × 100. A bag that costs ₹840 and sells for ₹1,200 makes ₹360 profit, which is a 30% margin. Use prices without GST on both sides.
Margin tells you how much of every rupee you sell for you keep as profit. It is the measure to use for comparing products, months or shops, because it is always expressed against sales.
The formula
Work with prices before GST: the GST you collect is not your income, and GST you can claim back on purchases is not your cost. Include freight and other costs of getting the item onto your shelf in the cost price.
Worked examples
One item. An invented luggage shop buys a bag for ₹840 and sells it for ₹1,200.
The whole shop. The same formula works for a month. If the shop sold ₹5,00,000 of goods whose cost of goods sold was ₹3,50,000, its gross profit was ₹1,50,000 and its gross margin was 30%. This is gross margin: rent, salaries and other running costs still have to come out of it. Our guide on calculating business profit takes the calculation down to net profit.
Pricing for a target margin
To find the price that gives a margin you want, divide the cost by (1 − margin):
For a 40% margin on the ₹840 bag: ₹840 ÷ 0.60 = ₹1,400. Check: ₹560 profit ÷ ₹1,400 = 40%. Adding 40% to the cost instead (₹840 × 1.4 = ₹1,176) gives only a 28.6% margin, because that is a 40% markup. The difference is explained in profit margin vs markup, and how to calculate markup covers the other measure.
Common mistakes
- Dividing by the cost instead of the selling price. That gives markup, which is always higher.
- Using GST-inclusive prices, which inflates the margin and changes it whenever a rate changes.
- Using MRP when you usually sell below it. Use the price customers really pay after regular discounts.
- Forgetting landing costs such as freight, which makes the cost look lower than it is.
The margin and markup calculator does the arithmetic for any item. If you record purchase costs in BILL OS, its margin reports show the figure across products without manual working.
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General information, not legal, tax or financial advice. Published by Chameron Digital.