Profit margin is the difference between the selling price of a product and the cost of producing and marketing that product.
It measures the profitability of a business, product, or service. It's expressed as a percentage; a higher number indicates a more successful business.
For small businesses, profit margins fall into two main categories:
- Gross profit margin
- Net profit margin
A profit margin is calculated by knowing the net income and sales number. A high profit margin is good for business while a low one requires attention to pull the business off the brink of collapse.
The Net Income is the total amount gained after the removal of expenses. And sales is the amount from sales.
To calculate:
Net Income / Sales
This means your net income should be divided by the sales. The result will indicate a high or low-profit margin.