Operating Margin Calculator
What is Operating Margin?
Operating margin is a critical profitability ratio that measures what percentage of total revenue remains after a company pays for its variable costs of production, such as wages and raw materials, as well as its fixed operating costs. It represents the efficiency of a company's core operations.
The Formula for Operating Margin
To calculate the operating margin, you first need to determine the Operating Income. The formula is expressed as:
Operating Income = Total Revenue – Cost of Goods Sold (COGS) – Operating Expenses
Operating Margin = (Operating Income / Total Revenue) * 100
Why Operating Margin Matters
Unlike gross margin, which only looks at the cost of goods, the operating margin includes overhead like rent, utilities, and administrative salaries. This makes it a superior metric for understanding how well a company manages its resources. A higher operating margin indicates a more efficient company that is better at controlling costs relative to its sales.
Example Calculation
If a retail business generates $200,000 in Revenue, has $80,000 in COGS, and spends $50,000 on Operating Expenses (rent, payroll, marketing):
- Operating Income: $200,000 – $80,000 – $50,000 = $70,000
- Operating Margin: ($70,000 / $200,000) * 100 = 35%
This means for every dollar the company earns in sales, it keeps $0.35 to cover non-operating costs like taxes and interest.