What are Margins?

What do margins mean?

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The difference in price between what a retailer and his customer pay for the same product. The margins for sales on products may only include the actual cost difference and not the overheads or other variable costs.

When discussing margin in a business accounting context, the margin is the overall difference between revenue and expenses. There are several different margins usually tracked by businesses: gross profit margins, operating margins, and net profit margins (also called the โ€œbottom lineโ€). The gross profit margin is a measure of revenues against the cost of goods sold (COGS). Operating profit margins account for COGS as well as operating expenses, such as labor, rent and utilities. Finally, net profit margin takes all the former into account as well as taxes, interest and any other expenses not previously captured. While all the margin numbers are important, it is the net profit margin that is the most important, because this is the businesses profits.

When buying products from the manufacturer for resale in your brick and mortar or eCommerce store it is essential that you calculate the margin carefully by taking into consideration your overheads. In order to make a profit, you will need to take into consideration overheads such as rental of your premise, wages of employees, and utility bills.

While you may look at gross profit margin or operating margin, the value of your businesses is really determined by your net profit margin. After all, it would be no good to have $1 billion in revenue if your company is operating at a loss when all the expenses are taken into account.

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