How operating margin is worked out
Take the cost of goods sold off revenue to get gross profit. Take operating expenses off that to get operating income. Operating margin is operating income as a percent of revenue. Interest and taxes are not part of it.
Operating margin % = (revenue − COGS − operating expenses) ÷ revenue × 100
Nothing is rounded until the result is shown.
Example
Revenue $500,000.00, cost of goods sold $300,000.00, operating expenses $140,000.00.
- Gross profit: $500,000.00 − $300,000.00 = $200,000.00
- Operating income: $200,000.00 − $140,000.00 = $60,000.00
- Operating margin: $60,000.00 ÷ $500,000.00 × 100 = 12%
Questions
What counts as operating expenses?
The costs of running the business that are not in the cost of goods sold, such as rent, salaries, marketing and utilities. Which costs belong where depends on how your books are kept.
Why does operating margin leave out interest and taxes?
It measures the business’s own trading before financing and tax. For the full bottom line, use the net income calculator.
How is it different from gross margin?
Gross margin stops after the cost of goods sold. Operating margin also takes off operating expenses, so it is lower or equal. See the gross margin calculator.
Can operating margin be negative?
Yes. If cost of goods sold plus operating expenses exceed revenue, operating income is negative and the margin is below zero.
What is a good operating margin?
This page does not give a benchmark. Margins differ a great deal between businesses, so compare with your own earlier periods.