Quite often, entrepreneurs start their business based on good margins. It evaluates the profitability of a business. In this article we will talk in detail about margin, as well as some of the features associated with it.
It doesn't matter how much income your business generates, it is important that you spend as little money as possible on its production. For example, if you receive 100 million dollars a year, and spend 100 million and one dollar, then you will not be able to make money from such a business. In order for your business to survive for a long time, it must generate income. No company will work for a long time if it brings in little income. The profit generated allows your business to stay afloat.
Every entrepreneur, starting his own business, must estimate the expected profitability. This is a must for your business to be successful. Therefore, before starting your business, you need to calculate the expected margin. This check will help you save your money and assess possible risks. You can often observe a situation where a business starts without calculating the risk. We recommend that you do this during the initial start of your business.
Margin Definition
Margin is an increase in the monetary equivalent, taking into account costs and the cost of the product. However, such a concept will not give you a complete definition of this monetary instrument. Margins increase if production costs decrease and product prices increase. So, you need to ensure maximum profit by reducing costs. Let's look at this definition in more detail.
First you need to supplement the above concept. 
Typically, margin is understood as the increase in monetary capital per unit of goods.
That is, marginality is the difference between all the costs that were spent on production and the profit received.
The process of calculating margin will be carried out both at the start of your business and throughout its existence.
The more often you determine your margin, the better quality your business will be because you will correctly estimate the expected cash gain.
Calculation formula
To understand the essence of this procedure, you need to specify the formula for calculating marginality:
MAR=DOH-IZD
This formula provides us with a clear understanding of the margin calculation process. There is nothing complicated about calculating margin. Two indicators will be enough for you to determine the profitability of your business.
Let's look at a specific example.
Let's say you need to produce 2000 units of goods, the market price of which is 20 rubles each. Total production costs are 25 thousand rubles.
Substituting the data into the previously stated formula:
MAR=2000*20-25000= 15,000 rubles.
Thus, we have established that the margin of our enterprise will be 15 thousand rubles.
It is also necessary to indicate that the margin can be calculated not in monetary terms, but as a percentage.
Let's look at another example.
Let's say your broker offers you to buy 500 shares at $1 per share. In addition, he said that their cost next month would be $3.
It turns out that you had $500, and with an investment in the stock market, your amount became equal to $1,500.
In formula form: MAR=1500*100/500=300%
That is, when investing money in stocks, your margin will be 300%. Any businessman will tell you that this is a great investment. We will not consider the possibilities of the stock market, but you need to understand that this activity has its own risks. Therefore, whether you invest money in it is up to you.
Purpose of margin calculation
The purpose of calculating margins is to assess the profitability of a business.
In order to correctly calculate the margin, you do not need to have extensive knowledge in the field of economics or investment financing. All you need is to use the above formulas. We recommend that you use a formula to determine the margin as a percentage.
This option will allow you to competently assess the possibilities of your financial investment. The margin interest rate will help determine expected returns over time. Guided by a correct assessment of the situation, you can choose the right solution.
The difference between margin and markup
The markup is the difference between the wholesale and retail prices. And we established earlier that marginality is the difference between profit and costs incurred. So the markup is defined as the difference in relation to cost, and the margin will be determined by the difference between value and cost.
Thus, we have established formulas for determining marginality. Which option to choose is up to you. A properly defined margin will allow you to manage your money more intelligently.
Various indicators are used to evaluate economic activity. The key is margin. In monetary terms, it is calculated as a markup. As a percentage, it is the ratio of the difference between sales price and cost to the sales price.
It is necessary to periodically evaluate the financial activities of an enterprise. This measure will allow you to identify problems and see opportunities, find weaknesses and strengthen strong positions.
Margin is an economic indicator. It is used to estimate the amount of markup on the cost of production. It covers the costs of delivery, preparation, sorting and sale of goods that are not included in the cost, and also generates the profit of the enterprise.
It is often used to assess the profitability of an industry (oil refining):
Or justify making an important decision at a separate enterprise (“Auchan”):
It is calculated as part of an analysis of the company's financial condition.
Examples and formulas
The indicator can be expressed in monetary and percentage terms. You can count it either way. If expressed in rubles, then it will always be equal to the markup and is found according to the formula:
M = CPU - C, where
CP - selling price;
C - cost.
However, when calculating as a percentage, the following formula is used:
M = (CPU - C) / CPU x 100
Peculiarities:
- cannot be 100% or more;
- helps analyze processes in dynamics.
An increase in product prices should lead to an increase in margins. If this does not happen, then the cost is rising faster. And in order not to be at a loss, it is necessary to reconsider the pricing policy.
Attitude towards markup
Margin ≠ Markup when expressed as a percentage. The formula is the same with the only difference - the divisor is the cost of production:
N = (CP - C) / C x 100
How to find by markup
If you know the markup of a product as a percentage and another indicator, for example, the selling price, calculating the margin is not difficult.
Initial data:
- markup 60%;
- sale price - 2,000 rub.
We find the cost: C = 2000 / (1 + 60%) = 1,250 rubles.
Margin, respectively: M = (2,000 - 1,250)/2,000 * 100 = 37.5%
Summary
The indicator is useful for small enterprises and large corporations to calculate. It helps to assess the financial condition, allows you to identify problems in the pricing policy of the enterprise and take timely measures so as not to miss out on profits. It is calculated along with net and gross profit for individual products, product groups and the entire company as a whole.
In the economic sphere, there are many concepts that people rarely encounter in everyday life. Sometimes we come across them while listening to economic news or reading a newspaper, but we only imagine the general meaning. If you have just started your entrepreneurial activity, you will have to familiarize yourself with them in more detail in order to correctly draw up a business plan and easily understand what your partners are talking about. One such term is the word margin.
In trade "Margin" expressed as the ratio of sales proceeds to the cost of the product sold. This is a percentage indicator, it shows your profit when selling. Net profit is calculated based on margin indicators. It’s very easy to find out the margin indicator
Margin=Profit/Sales Price * 100%
For example, you bought a product for 80 rubles, and the selling price was 100. The profit is 20 rubles. Let's do the calculation
20/100*100%=20%.
The margin was 20%. If you have to work with European colleagues, it is worth considering that in the West the margin is calculated differently than in our country. The formula is the same, but net income is used instead of sales proceeds.
This word is widespread not only in trade, but also on stock exchanges and among bankers. In these industries, it means the difference in securities prices and the bank’s net profit, the difference in interest rates on deposits and loans. For different areas of the economy, there are different types of margin.
Margin at the enterprise
The term gross margin is used in businesses. It means the difference between profit and variable costs. It is used to calculate net income. Variable costs include equipment maintenance costs, labor costs, and utilities. If we are talking about production, then gross margin is the product of labor. It also includes non-operating services that are profitable from outside. This is an identifier of a company's profitability. From it various monetary bases are formed to expand and improve production.
Margin in banking
Credit margin– the difference between the commodity value and the amount allocated by the bank for its purchase. For example, you take out a table worth 1000 rubles on credit for a year. After a year, you pay back 1,500 rubles in total with interest. Based on the formula above, the margin on your loan for the bank will be 33%. Credit margin indicators for the bank as a whole affect the interest rate on loans.
Banking– the difference between the interest rate coefficients on deposits and issued loans. The higher the interest rate on loans and the lower the interest rate on deposits, the greater the bank margin.
Net interest– the difference between interest income and expense in a bank in relation to its assets. In other words, we subtract the bank's expenses (paid loans) from income (profit on deposits) and divide by the amount of deposits. This indicator is the main one when calculating the bank’s profitability. It defines stability and is freely available to interested investors.
Warranty– the difference between the probable value of the collateral and the loan issued against it. Determines the level of profitability in case of non-return of money.
Margin on the exchange
Among traders participating in exchange trading, the concept of variation margin is widespread. This is the difference between the prices of the purchased futures in the morning and in the evening. A trader buys futures for a certain amount in the morning at the beginning of trading, and in the evening, when trading closes, the morning price is compared with the evening price. If the price has increased, the margin is positive; if it has decreased, the margin is negative. It is taken into account daily. If analysis is needed over several days, the indicators are added up and the average value is found.
The difference between margin and net income
Indicators such as margin and net income are often confused. To feel the difference, you should first understand that margin is the difference between the values of purchased and sold goods, and net income is the amount from sales minus consumables: rent, equipment maintenance, utility bills, wages, etc. If we subtract the tax from the resulting amount, we get the concept of net profit.
Margin trading is a method of buying and selling futures using borrowed funds against certain collateral - margin.
The difference between margin and “cheat”
The difference between these concepts is that the margin is the difference between the sales profit and the cost of the goods sold, and the markup is the profit and the cost of the purchase.
In conclusion, I would like to say that the concept of margin is very common in the economic sphere, but depending on the specific case, it affects different indicators of the profitability of an enterprise, bank or stock exchange.
Margin (English margin - difference, advantage) is one of the types of profit, an absolute indicator of the functioning of an enterprise, reflecting the result of primary and additional activities.
Unlike relative indicators (for example, ), margin is necessary only for analyzing the internal situation in the organization, this indicator does not allow comparing several companies with each other. In general terms, margin reflects the difference between two economic or financial indicators.
What is margin
Margin in trading– this is a trade margin, a percentage added to the price to obtain the final result.
What is markup and margin in trading, as well as how they differ and what you should pay attention to when talking about them, the video clearly explains:
IN microeconomics margin(grossprofit - GP) - a type of profit that reflects difference between revenue and costs for manufactured products, work performed and services provided, or the difference between the price and the cost of a unit of goods. This type of profit coincides with the indicator “ profit from sales».
Also within economics of the company allocate marginal income(contribution margin - CM) is another type of profit that shows the difference between revenue and variable costs. This type of profit helps to draw conclusions about the share of variable costs in revenue.
IN financial sector under the term " margin» refers to the difference in interest rates, exchange rates and securities and interest rates. Almost all financial transactions are aimed at obtaining margin - additional profit from these differences.
For commercial banks margin– this is the difference between the interest on loans issued and deposits used. Margin and marginal income can be measured both in value terms and as a percentage (the ratio of variable costs to revenue).
On securities market under margin refers to collateral that can be left to obtain a loan, goods and other valuables. They are necessary for transactions on the securities market.
A margin loan differs from a traditional loan in that the collateral is only a portion of the loan amount or the proposed transaction amount. Typically the margin is up to 25% of the loan amount.
Margin also refers to the advance of cash provided when purchasing futures.
Gross and percentage margin
Another name for marginal income is the concept of “ gross margin"(grossprofit – GP). This indicator reflects the difference between revenue and total or variable costs. The indicator is necessary for analyzing profit taking into account cost.
Interest margin shows the ratio of total and variable costs to revenue (income). This type of profit reflects the share of costs in relation to revenue.
Revenue(TR– total revenue) – income, the product of the unit price and the volume of production and sales. Total costs (TC – totalcost) – cost price, consisting of all costing items (materials, electricity, wages, etc.).
Cost price are divided into two types of costs - fixed and variable.
TO fixed costs(FC – fixed cost) include those that do not change when capacity (production volume) changes, for example, depreciation, director’s salary, etc.
TO variable costs(VC – variable cost) include those that increase/decrease due to changes in production volumes, for example, the earnings of key workers, raw materials, materials, etc.
Margin - calculation formula
Gross Margin
GP=TR-TC or CM=TR-VC
where GP is gross margin, CM is gross marginal income.
Interest margin calculated using the following formula:
GP=TC/TR orCM=VC/TR,
where GP is interest margin, CM is interest margin income.
where TR is revenue, P is the price of a unit of production in monetary terms, Q is the number of products sold in physical terms.
TC=FC+VC, VC=TC-FC
where TC is the total cost, FC is fixed costs, VC is variable costs.
Gross margin is calculated as the difference between income and costs, percentage margin is calculated as the ratio of costs to income.
After calculating the margin value, you can find contribution margin ratio, equal to the ratio of margin to revenue:
To md =GP/TR or To md =CM/TR,
where K md is the marginal income coefficient.
This indicator K md reflects the share of margin in the total revenue of the organization; it is also called rate of marginal income.
For industrial enterprises the margin rate is 20%, for retail enterprises – 30%. In general, the marginal income coefficient is equal to profitability of sales(by margin).
Video - profitability of sales, the difference between margin and markup:
The economic term “margin” is used not only in trade and stock exchange operations, but also in insurance and banking. This term describes the difference between the trade value of a product, which is paid by the buyer, and its cost, which consists of production costs. For each field of activity, the term will have its own specific use: in stock exchange activities, this concept describes the difference in securities rates, interest rates, quotes or other indicators. This is a rather unique, non-standard indicator for stock exchange transactions. In terms of brokerage operations on stock markets, margin acts as collateral, and trading is called “margin”.
In the activities of commercial banks, margin describes the difference between interest on issued loan products and existing deposits. One of the popular concepts in banking is “credit margin”. This term helps describe the difference obtained if the agreed amount is subtracted from the final loan amount issued to bank clients. Another indicator that directly describes the efficiency of banking activities can be considered “net margin” expressed as percentages. The calculation is made by finding the difference between capital and net income, measured as a percentage. For any bank, net income is generated through the sale of credit and investment products. When issuing a loan amount secured by property, to determine the profitability of the transaction, the “guarantee margin” is calculated: the amount of the loan amount is subtracted from the value of the collateral property.
This term simplifies the concept of profit. The indicator can be expressed in:
- percent (calculated as the ratio between the difference between the cost and the cost of the product to the cost);
- in absolute terms – rubles (calculated as a trade margin);
- ratio of shares (for example, 1:4, used less frequently than the first two).
Thanks to this indicator, the costs of delivery, product rejection, and sales organization, which are not reflected in the cost of the product, are reimbursed. It is also at its expense that the company’s profit is generated.
If the margin does not increase with an increase in trading value, this means that the cost of goods is increasing faster, and the company risks soon becoming unprofitable. To prevent this from happening, the pricing of the product must be adjusted.
This indicator is relevant for calculations for both large and small organizations. Let's summarize why it is needed:
- analysis of the organization's profitability;
- analysis of the financial condition of the organization, its dynamics;
- when making a responsible decision, in order to justify it;
- forecasting the profitability of possible clients of the organization;
- formation of pricing policies for certain groups of goods.
It is used in the analysis of financial activities along with net and gross profit for both individual goods or their groups, and the entire organization as a whole.
Gross margin is revenue from sales of products for a certain period from which variable costs allocated for the production of these products are subtracted. This is an analytical indicator, which, when calculated, may include income from other activities of the enterprise: the provision of non-production services, income from the commercial use of housing and communal services and other activities. The net profit indicator and the fund allocated for production development depend on the gross margin. That is, in an economic analysis of the activities of the entire enterprise, it will reflect its profitability through the share of profit in the total volume of proceeds.
How to calculate margin
The margin is calculated based on the ratio in which the final result will be expressed: absolute or percentage.
The calculation can be made if the trade margin and the final cost of the goods are accurately indicated. These data make it possible to determine mathematically the margin, expressed as a percentage, since these two indicators are interrelated. First, the cost is determined:
Total cost of goods – Trade margin = Cost of goods.
Then we calculate the margin itself:
(Total cost – Product cost)/Total cost X 100% = Margin.
Due to different approaches to understanding margin (as a profit ratio or as net profit), there are different methods for calculating this indicator. But both methods help in the assessment:
— the possible profitability of the launched project and its prospects for development and existence;
— the value of the product life cycle;
— determining the effective volumes of production of goods and products.
Margin formula
If we need to express the indicator through percentages, in trading operations the formula is used to determine the margin:
Margin = (Product Cost – Product Cost) / Product Cost X 100%.
If we express the indicator in absolute values (foreign or national currency), we use the formula:
Margin = Product Cost – Product Cost.
What is marginality
Most often, marginality describes the increase in capital in monetary terms per unit of production. In general terms, this is the difference between production costs and the profit received as a result of product sales.
Marginality in commerce is the marginal profit of a product, subject to the minimum cost and the maximum possible markup. In this case, they talk about the high profitability of the enterprise. If a product is sold at a high price, the investment in production is large, but with all this, the profit barely compensates for the costs - we are talking about low margin, since in this case the profitability ratio (margin) will be quite low. Using the concept of “profitability ratio,” we take 100% of the cost of the product paid by the consumer. The profitability of the enterprise is higher, the higher this ratio is.
The marginality of a business or enterprise is its ability to obtain net income from invested capital for a certain period, measured as percentage.
The procedure for determining margin is carried out not only at the initial stage of launching a product (or a company as a whole), but also throughout the entire production period. Constant calculation of margin allows you to adequately assess the possible influx of income and the more sustainable the business development will be.
It should be noted that in Russia and Europe there are different approaches to understanding marginality. For Russia, a more typical approach is where this concept is considered to be net gross income. Another analogue of this concept is the amount of coverage. In this case, the emphasis is on this amount as part of the revenue that forms the profit of the enterprise and is responsible for covering costs. The main principle here is to increase the organization’s profit in proportion to the reimbursement of production costs.
The European approach tends to reflect the gross margin as a percentage of the total income received after the sale of the product, from which the costs associated with the production of the product have already been deducted.
The main difference between the approaches is that the Russian one operates with net profit in monetary units, the European one relies on percentage indicators and is more objective in assessing the financial well-being of the organization.
When calculating marginality, economists pursue the following goals:
- assessment of the prospects of a specific product on the market;
- what is its “lifespan” on the market;
- the relationship between the prospects or risks of introducing a product to the market and the success of the launched enterprise.
It is important to calculate the marginality of a product for those companies that produce several types or groups of goods. At the same time, we obtain marginality indicators that can clearly show which of the goods have a better chance of future production, and the production of which can, or even should, be abandoned.
Margin and markup - their difference
If we express the margin as a percentage, then in this case it is impossible to say that it can be equated to a markup. When calculating in this case, the markup will always be greater than the margin. Also in this case it can be more than 100% (unlike the expression in absolute values, where it cannot be more than 100%). Example:
Markup = (price of goods (2000 rubles) - cost of goods (1500 rubles)) / cost of goods (1500 rubles) X 100 = 33.3%
Margin = price of the product (2000 rub.) – cost of the product (1500 rub.) = 500 rub.
Margin = (product price (2000 rubles) – cost of goods (1500 rubles))/product price (2000 rubles) X 100 = 25%
If we consider in absolute terms, then 500 rubles. – this is margin = markup, but when calculated as a percentage, margin (25%) ≠ markup (33.3%).
The markup as a result means the ratio of profit to the cost, and the margin is the ratio of profit to the trading value of the product.
Another nuance through which you can identify the difference between the concepts of “markup” and “margin”: the markup can be considered as the difference between the wholesale and retail cost of a product, and the margin as the difference between cost and cost.
In professional economic analysis, it is important not only to calculate the indicator mathematically correctly, but also to take the initial data necessary for specific circumstances and correctly use the results obtained. Using certain calculation methods, you can obtain data that differs from each other. But taking into account the conventionality of the considered indicators, in order to fully and effectively describe the economic state of the organization, additional analysis is performed on other indicators.
