How to calculate profit margin – The full guide

To grow your startup consistently and ensure sustainable business success, understanding your profit margins is essential.

Not only will demonstrating healthy profit margins help you attract investors and secure funding, but it will also put you in a strong financial position as you continue to develop the business.

Calculating profit margin will give you a clear gauge of your company’s ongoing financial efficiency 

To help you on your quest for commercial success, we’re going to show you exactly how. But first, let’s consider what profit margin is and its role in a business’s financial management activities.

Table of contents

• What is profit margin?
• How do I calculate profit margin?
• What is a good profit margin for a UK business?
• Profit margin FAQ

What is profit margin?

Profit margins are one of the most straightforward and widely calculated financial ratios in the world of corporate finance.

Profit margin measures the extent to which the activities of a business generate money. In other words, it shows how much of the generated revenue is profit – fuel for your company’s growth, as opposed to the bare minimum needed to stay afloat. 

How do I calculate profit margin?

Now that you’re familiar with the concept of profit and profit margin, let’s see how you can apply it in real life.

Sales profit formula

Understanding your sales profit will give you a clear gauge of the impact of your current various sales-centric processes and marketing campaigns. Working with this metric will also help you work out your profit margins. There’s a simple formula you can use to calculate sales profit:

Sales profit = Total sales revenue - Total expenses 

Profit margin formula

Knowing how to calculate gross profit margin with confidence and consistency is key to measuring your success. There’s a simple profit margin formula that you can use to measure the profitability of your sales.

Profit margin (%) = (Revenue - Cost of goods sold) / Revenue x 100

Measure your profitability quickly, and leave yourself some room to Bloom – rather than sweating the numbers, scroll to the top of this page and our swift and simple profit margin calculator tool will do all the work for you.

Example: How to calculate a 20% profit margin

Say, you add umbrellas to your webshop’s offering. The umbrellas cost you £10 a piece until they’re ready to ship to your customers. How much should you charge for an umbrella to reach a 20% profit margin? Hint: it’s not £12:

To sell at a 20% profit margin, you need to work out the markup you need to add over your expenses. Here’s a simple formula to reverse-engineer your asking price based on a desired profit margin.

Target price = Cost of goods / [1 - (Target margin / 100)]

So in the case of the umbrellas it looks something like this: 10 / [1 - (20 / 100)] or 10 / 0.8, which gives us an asking price of £12.5. So you need to sell your umbrellas with a 25%, or £2.5 markup to reach a 20% profit margin.

Gross profit margin vs. net profit margin

The key difference between gross profit margin and net profit margin is the costs included in the calculation.

The gross profit margin formula includes deducted costs associated only with production (manufacturing costs including packaging and parts), whereas the net profit margin also accounts for operating expenses as well as debt, taxes, and any other overhead costs.

What is a good profit margin for a UK business?

Like many things in business, there is an exact sweet spot when it comes to what makes a good profit margin. Benchmarks vary between industries, but as a general rule of thumb, solid profit margins are considered in the 15% to 20% range.

To establish an accurate profit margin for your startup, you should explore standards within your industry and set a benchmark accordingly.

Profit margin FAQ

Are profit and profit margin the same?

Profit and profit margin are slightly different. Here are two clear definitions for your guidance:

• Profit is an amount – it answers the question of how much money you’re left with after selling goods or services and deducting all expenses

• Profit margin is a percentage – it’s an important indicator of profitability, also often expressed as ‘cents on a dollar’

Profit margin vs markup – What's the difference?

When considering return on equity calculations, knowing the difference between profit margin and markup will help you get your head around ROE with relative ease.

Both profit margin and markup use revenue and costs as a core aspect of their calculations.

The key difference between profit margin and markup is that profit margin refers to sales minus the cost of goods you sell while markup quantifies the amount by which the cost of a good is increased to reach the final selling price.

Think of them as metrics for the same thing, but used at different points in time: you use markup to set a target profit you want to generate by selling a product or a service, and profit margin to measure the success after you actually make the sale.

We hope you’ve found this guide to calculating your profit margins helpful and that you benefit from our calculator tool. 

If you’re looking for any further advice concerning your startup’s financing or funding prospects, please get in touch. We’ll be more than happy to help get the ball rolling.