Gross margin includes. What is margin in simple words? Gross margin in Russia and Europe

PROFITABILITY THRESHOLD

BASIC CONCEPTS OF OPERATIONAL ANALYSIS, PROFITABILITY THRESHOLD, GROSS MARGIN, FINANCIAL STRENGTH AND OPERATING LEVERAGE.

Operational analysis (cost-volume-profit)- analysis of the results of the enterprise’s activities based on the ratio of production volumes, profits and costs, allowing to determine the relationship between costs and income at different production volumes

Profitability threshold (break even, critical point, critical volume of production (sales)) is such a volume of sales of a company at which sales revenue fully covers all costs of production and sales of products. To determine this point, regardless of the methodology used, it is necessary first of all to divide the projected costs into fixed and variable.

The profitability threshold is such sales revenue at which the company no longer has losses, but still does not have profits. The gross margin is exactly enough to cover fixed costs, and the profit is zero, i.e.

Profit = Gross Margin– Fixed costs = 0

The difference between the achieved actual sales revenue and the profitability threshold constitutes the margin of financial strength of the enterprise. If sales revenue falls below the profitability threshold, then the financial position of the enterprise worsens and a liquidity deficit occurs, that is

Margin of financial strength = Sales revenue – Profitability threshold

According to the “direct costing” system, accounting and reporting at enterprises are organized in such a way that it becomes possible to regularly monitor data according to the “cost – volume – profit” scheme. The marginal income of an enterprise (gross margin) is revenue minus variable costs. The contribution margin per unit of production is the difference between the price of that unit and its variable costs.

Gross margin is the gross profit of a business organization, expressed as a percentage of the company's revenue.

The difference between revenue from product sales and variable costs. V.m. is a calculated indicator; in itself it does not characterize the financial condition of the enterprise or any aspect of it, but is used in the calculations of a number of indicators. The ratio of gross margin to the amount of revenue from sales of products is called the gross margin ratio.

Margin of financial strength - the ratio of the difference between the current sales volume and the sales volume at the break-even point to the current sales volume, expressed as a percentage

How far the company is from the break-even point shows the margin of financial strength. This is the difference between the actual output and the output at the break-even point. The percentage ratio of the financial safety margin to the actual volume is often calculated. This value shows by how many percent the sales volume can be reduced in order for the company to avoid losses.

Let's introduce the following notation: B - sales revenue.

Рн - sales volume in physical terms.

Tbd is the break-even point in monetary terms.

Tbn is the break-even point in physical terms.

Formula for financial safety margin in monetary terms:

ZPd = (B -Tbd)/B * 100%, where

ZPD - margin of financial strength in monetary terms.

Formula for financial safety margin in physical terms:

ZPn = (Rn -Tbn)/Rn * 100%, where

ZPn - margin of financial strength in physical terms.

The margin of safety changes quickly near the break-even point and more and more slowly as it moves away from it. A good idea of the nature of this change can be obtained by plotting the dependence of the safety margin on the sales volume.

OPERATING LEVER- a progressive increase in the amount of net profit with an increase in sales volume, due to the presence of fixed costs that do not change with an increase in the volume of production and sales of products.

Operating leverage is a quantitative assessment of changes in profit depending on changes in sales volumes. The ratio of the contribution to cover fixed costs to the amount of profit is called operating leverage.

Economic terms are often ambiguous and confusing. The meaning contained in them is intuitive, but rarely does anyone succeed in explaining it in publicly accessible words, without prior preparation. But there are exceptions to this rule. It happens that a term is familiar, but upon in-depth study it becomes clear that absolutely all its meanings are known only to a narrow circle of professionals.

Everyone has heard, but few people know

Let’s take the term “margin” as an example. The word is simple and, one might say, ordinary. Very often it is present in the speech of people who are far from economics or stock trading.

Most believe that margin is the difference between any similar indicators. In daily communication, the word is used in the process of discussing trading profits.

Few people know absolutely all the meanings of this fairly broad concept.

However to modern man It is necessary to understand all the meanings of this term, so that at an unexpected moment you “don’t lose face.”

Margin in economics

Economic theory says that margin is the difference between the price of a product and its cost. In other words, it reflects how effectively the activities of the enterprise contribute to the transformation of income into profit.

Margin is a relative indicator; it is expressed as a percentage.

Margin=Profit/Revenue*100.

The formula is quite simple, but in order not to get confused at the very beginning of studying the term, let's consider a simple example. The company operates with a margin of 30%, which means that in every ruble earned, 30 kopecks constitute net profit, and the remaining 70 kopecks are expenses.

Gross Margin

In analyzing the profitability of an enterprise, the main indicator of the result of the activities carried out is the gross margin. The formula for calculating it is the difference between revenue from sales of products during the reporting period and variable costs for the production of these products.

The level of gross margin alone does not allow for a full assessment of the financial condition of the enterprise. Also, with its help, it is impossible to fully analyze individual aspects of its activities. This is an analytical indicator. It demonstrates how successful the company is as a whole. is created due to the labor of enterprise employees spent on the production of products or provision of services.

It is worth noting one more nuance that must be taken into account when calculating such an indicator as “gross margin”. The formula can also take into account income outside of sales economic activity enterprises. These include writing off accounts receivable and payable, providing non-industrial services, income from housing and communal services, etc.

It is extremely important for an analyst to correctly calculate the gross margin, since enterprises, and subsequently development funds, are formed from this indicator.

In economic analysis, there is another concept similar to gross margin, it is called “profit margin” and shows the profitability of sales. That is, the share of profit in total revenue.

Banks and margin

The bank's profit and its sources demonstrate a whole series indicators. To analyze the work of such institutions, it is customary to count as many as four various options margin:

Credit margin is directly related to work under loan agreements and is defined as the difference between the amount specified in the document and the amount actually issued.

Bank margin is calculated as the difference between interest rates on loans and deposits.

Net interest margin is key indicator efficiency of banking activities. The formula for its calculation looks like the ratio of the difference in commission income and expenses for all operations to all bank assets. Net margin can be calculated based on all bank assets, or only on those currently involved in work.

The guarantee margin is the difference between the estimated value of the collateral property and the amount issued to the borrower.

Such different meanings

Of course, economics does not like discrepancies, but in the case of understanding the meaning of the term “margin” this happens. Of course, on the territory of the same state, everyone is completely consistent with each other. However, the Russian understanding of the term “margin” in trade is very different from the European one. In the reports of foreign analysts, it represents the ratio of profit from the sale of a product to its selling price. In this case, the margin is expressed as a percentage. This value is used for a relative assessment of the effectiveness of the company's trading activities. It is worth noting that the European attitude towards calculating margins is fully consistent with the basics of economic theory, which were described above.

In Russia, this term is understood as net profit. That is, when making calculations, they simply replace one term with another. For the most part, for our compatriots, margin is the difference between revenue from the sale of a product and overhead costs for its production (purchase), delivery, and sales. It is expressed in rubles or other currency convenient for settlements. It can be added that the attitude towards margin among professionals is not much different from the principle of using the term in everyday life.

How does margin differ from trading margin?

There are a number of common misconceptions about the term “margin”. Some of them have already been described, but we have not yet touched on the most common one.

Most often, the margin indicator is confused with the trading margin. It's very easy to tell the difference between them. The markup is the ratio of profit to cost. We have already written above about how to calculate margin.

A clear example will help dispel any doubts that may arise.

Let’s say a company bought a product for 100 rubles and sold it for 150.

Let's calculate the trade margin: (150-100)/100=0.5. The calculation showed that the markup is 50% of the cost of the goods. In the case of margin, the calculations will look like this: (150-100)/150=0.33. The calculation showed a margin of 33.3%.

Correct analysis of indicators

For a professional analyst, it is very important not only to be able to calculate an indicator, but also to give a competent interpretation of it. This is a difficult job that requires
great experience.

Why is this so important?

Financial indicators are quite conditional. They are influenced by valuation methods, accounting principles, conditions in which the enterprise operates, changes in the purchasing power of the currency, etc. Therefore, the resulting calculation result cannot be immediately interpreted as “bad” or “good.” Additional analysis should always be performed.

Margin on stock markets

Exchange margin is a very specific indicator. In the professional slang of brokers and traders, it does not mean profit at all, as was the case in all the cases described above. Margin on stock markets becomes a kind of collateral when making transactions, and the service of such trading is called “margin trading”.

The principle of margin trading is as follows: when concluding a transaction, the investor does not pay the entire contract amount in full, he uses his broker, and only a small deposit is debited from his own account. If the outcome of the operation carried out by the investor is negative, the loss is covered from the security deposit. And in the opposite situation, the profit is credited to the same deposit.

Margin transactions provide the opportunity not only to make purchases using borrowed funds from the broker. The client may also sell borrowed securities. In this case, the debt will have to be repaid with the same securities, but their purchase is made a little later.

Each broker gives its investors the right to make margin trades independently. At any time, he may refuse to provide such a service.

Benefits of Margin Trading

By participating in margin transactions, investors receive a number of benefits:

The ability to trade on financial markets without having enough money in your account large sums. It does margin trading highly profitable business. However, when participating in operations, one should not forget that the level of risk is also not small.
Opportunity to receive when the market value of shares decreases (in cases where the client borrows securities from a broker).
To trade different currencies, it is not necessary to have funds in these particular currencies on your deposit.

Risk management

To minimize the risk when concluding margin transactions, the broker assigns each of its investors a collateral amount and a margin level. In each specific case, the calculation is made individually. For example, if after a transaction there is a negative balance in the investor’s account, the margin level is determined by the following formula:

UrM=(DK+SA-ZI)/(DK+SA), where:

DK - cash investor deposited;

CA - value of shares and others securities investor accepted by the broker as collateral;

ZI is the debt of the investor to the broker for the loan.

It is possible to carry out an investigation only if the margin level is at least 50%, and unless otherwise provided in the agreement with the client. According to general rules, the broker cannot enter into transactions that would result in the margin level falling below the established limit.

In addition to this requirement, for carrying out margin transactions on the stock markets, a number of conditions are put forward, designed to streamline and secure the relationship between the broker and the investor. To be negotiated maximum size losses, debt repayment terms, conditions for changing the contract and much more.

It is quite difficult to understand all the diversity of the term “margin” in a short time. Unfortunately, it is impossible to talk about all areas of its application in one article. The above considerations indicate only key points its use.

Various indicators are used to evaluate economic activity. The key is margin. In monetary terms, it is calculated as a markup. As a percentage, it is the ratio of the difference between sales price and cost to the sales price.

Evaluate periodically financial activities enterprises are necessary. This measure will help identify problems and see opportunities, find weak points and strengthen its strong position.

Margin is economic indicator. It is used to estimate the amount of markup on the cost of production. It covers the costs of delivery, preparation, sorting and sale of goods that are not included in the cost, and also generates the profit of the enterprise.

It is often used to assess the profitability of an industry (oil refining):

Or justify making an important decision at a separate enterprise (“Auchan”):

It is calculated as part of an analysis of the company's financial condition.

Examples and formulas

The indicator can be expressed in monetary and percentage terms. You can count it either way. If expressed in rubles, then it will always be equal to the markup and is found according to the formula:

M = CPU - C, where

CP - selling price;
C - cost.
However, when calculating as a percentage, the following formula is used:

M = (CPU - C) / CPU x 100

Peculiarities:

cannot be 100% or more;
helps analyze processes in dynamics.

An increase in product prices should lead to an increase in margins. If this does not happen, then the cost is rising faster. And in order not to be at a loss, it is necessary to reconsider the pricing policy.

Attitude towards markup

Margin ≠ Markup when expressed as a percentage. The formula is the same with the only difference - the divisor is the cost of production:

N = (CP - C) / C x 100

How to find by markup

If you know the markup of a product as a percentage and another indicator, for example, the selling price, calculating the margin is not difficult.

Initial data:

markup 60%;
sale price - 2,000 rub.

We find the cost: C = 2000 / (1 + 60%) = 1,250 rubles.

Margin, respectively: M = (2,000 - 1,250)/2,000 * 100 = 37.5%

Resume

The indicator is useful for small enterprises and large corporations to calculate. It helps to assess the financial condition, allows you to identify problems in the pricing policy of the enterprise and take timely measures so as not to miss out on profits. It is calculated along with net and gross profit for individual products, product groups and the entire company as a whole.

Briefly: Various indicators are used to evaluate economic activity. The key is margin. In monetary terms, it is calculated as a markup. As a percentage, it is the ratio of the difference between sales price and cost to the sales price.

It is necessary to periodically evaluate the financial activities of an enterprise. This measure will allow you to identify problems and see opportunities, find weaknesses and strengthen strong positions.

Margin is an economic indicator. It is used to estimate the amount of markup on the cost of production.

How to calculate margin and markup in Excel

It covers the costs of delivery, preparation, sorting and sale of goods that are not included in the cost, and also generates the profit of the enterprise.

It is often used to assess the profitability of an industry (oil refining):

Or justify making an important decision at a separate enterprise (“Auchan”):

It is calculated as part of an analysis of the company's financial condition.

Examples and formulas

The indicator can be expressed in monetary and percentage terms. You can count it either way. If expressed in rubles, then it will always be equal to the markup and is found according to the formula:

M = CPU - C, where

CP - selling price;
C - cost.
However, when calculating as a percentage, the following formula is used:

M = (CPU - C) / CPU x 100

Peculiarities:

cannot be 100% or more;
helps analyze processes in dynamics.

Rice. 1. Dynamic chart

Attitude towards markup

Margin ≠ Markup when expressed as a percentage. The formula is the same with the only difference - the divisor is the cost of production:

N = (CP - C) / C x 100

Download the margin calculation algorithm in excele

How to find by markup

If you know the markup of a product as a percentage and another indicator, for example, the selling price, calculating the margin is not difficult.

Initial data:

markup 60%;
sale price - 2,000 rub.

We find the cost: C = 2000 / (1 + 60%) = 1,250 rubles.

Margin, respectively: M = (2,000 - 1,250)/2,000 * 100 = 37.5%

Resume

Peter Stolypin, 2015-09-22

Questions and answers on the topic

No questions have been asked about the material yet, you have the opportunity to be the first to do so

Economic concepts

What is margin

Margin is one of the determining factors in pricing. Meanwhile, not every aspiring entrepreneur can explain the meaning of this word. Let's try to rectify the situation.

The concept of “margin” is used by specialists from all spheres of the economy. This is usually relative value, which is an indicator of profitability.

How is margin calculated: differences between markup and margin

In trade, insurance, banking margin has its own specifics.

How to calculate margin

Economists understand margin as the difference between the cost of a product and its selling price. It serves as a reflection of business performance, that is, an indicator of how successfully a company converts revenues into profits.

Margin is a relative value expressed as a percentage. The margin calculation formula is as follows:

Profit/Revenue*100 = Margin

Let's give simplest example. It is known that the enterprise margin is 25%. From this we can conclude that every ruble of revenue brings the company 25 kopecks of profit. The remaining 75 kopecks relate to expenses.

What is gross margin

When assessing the profitability of a company, analysts pay attention to gross margin - one of the main indicators of a company's performance. Gross margin is determined by subtracting the cost of manufacturing a product from the revenue from its sale.

Knowing only the size of the gross margin, one cannot draw conclusions about the financial condition of the enterprise or evaluate a specific aspect of its activities. But using this indicator you can calculate other, no less important ones. In addition, gross margin, being an analytical indicator, gives an idea of the company's efficiency. The formation of gross margin occurs through the production of goods or provision of services by the company's employees. It is based on work.

It is important to note that the formula for calculating gross margin takes into account income that does not result from the sale of goods or the provision of services. Non-operating income is the result of:

writing off debts (receivables/creditors);
measures to organize housing and communal services;
provision of non-industrial services.

Once you know the gross margin, you can also know the net profit.

Gross margin also serves as the basis for the formation of development funds.

When talking about financial results, economists pay tribute to the profit margin, which is an indicator of the profitability of sales.

Profit Margin is the percentage of profit in the total capital or revenue of the enterprise.

Margin in banking

Analysis of the activities of banks and the sources of their profit involves the calculation of four margin options. Let's look at each of them:

1. Banking margin, that is, the difference between loan and deposit rates.
2. Credit margin, or the difference between the amount fixed in the contract and the amount actually issued to the client.
3. Guarantee margin– the difference between the value of the collateral and the amount of the loan issued.
4. Net interest margin (NIM)– one of the main indicators of the success of a banking institution. To calculate it, use the following formula:
NIM = (Fees and Fees) / Assets
When calculating the net interest margin, all assets without exception can be taken into account or only those that are currently in use (generating income).

Margin and trading margin: what is the difference

Oddly enough, not everyone sees the difference between these concepts. Therefore, one is often replaced by another. To understand the differences between them once and for all, let’s remember the formula for calculating margin:

Profit/Revenue*100 = Margin

(Sales price – Cost)/Revenue*100 = Margin

As for the formula for calculating the markup, it looks like this:

(Selling price – Cost)/Cost*100 = Trade margin

For clarity, let's give a simple example. The product is purchased by the company for 200 rubles and sold for 250.

So, here is what the margin will be in this case: (250 – 200)/250*100 = 20%.

And this is what it will be like trade margin: (250 – 200)/200*100 = 25%.

Conclusion

The concept of margin is closely related to profitability. In a broad sense, margin is the difference between what is received and what is given. However, margin is not the only parameter used to determine efficiency. By calculating the margin, you can find out other important indicators of the enterprise’s economic activity.

Markup or margin? What's the difference?

As you know, any trading company lives off the markup, which is necessary to cover costs and make a profit:

Cost + markup = selling price

What is margin, why is it needed and how does it differ from markup, if it is known that margin is the difference between the selling price and cost?

It turns out that this is the same amount:

Markup = margin

What's the difference?

The difference lies in the calculation of these indicators in percentage terms (the markup refers to the cost, the margin refers to the price).

Markup = (Sale Price - Cost) / Cost * 100

Margin = (Sale Price - Cost) / Sale Price * 100

It turns out that in digital terms the amount of markup and margin are equal, but in percentage terms the markup is always greater than the margin.

For example:

The margin cannot be equal to 100% (unlike the markup), because

Management accounting

in this case, the Cost should be equal to zero ((10-0)/10*100=100%), which, as you know, does not happen!

Like all relative (expressed as a percentage) indicators, markup and margin help to see processes in dynamics. With their help, you can track how the situation changes from period to period.

Looking at the table, we clearly see that the markup and margin are directly proportional: the higher the markup, the greater the margin, and therefore the profit.

The interdependence of these indicators makes it possible to calculate one indicator given the second.

Thus, if a company wants to reach a certain level of profit (margin), it needs to calculate the markup on the product, which will allow it to obtain this profit.

As an example, let's calculate:

— margin, knowing the sales amount and markup;

— markup, knowing the sales amount and margin

Sales amount = 1000 rub.

Markup = 60%

(1000 - x) / x = 60%

Hence x = 1000 / (1 + 60%) = 625

It remains to find the margin:

1000 — 625 = 375

375 / 1000 * 100 = 37,5%

Thus, the formula for calculating margin through markup and sales volume will look like:

Margin = (Sales Volume - Sales Volume / (1 + Markup)) / Sales Volume * 100

Sales amount = 1000 rub.

Margin = 37.5%

Let’s take the cost as “x” and, based on the above formula, create an equation:

(1000 - x) / 1000 = 37.5%

Hence x = 625

All that remains is to find the markup:

1000 — 625 = 375

375 / 625 * 100 = 60%

Thus, the formula for calculating the markup through margin and sales volume will look like:

Markup = (Sales Volume - (Sales Volume - Margin * Sales Volume)) / (Sales Volume - Margin * Sales Volume) * 100

This strange phrase is often found today in articles on economic topics. Let's figure out what gross margin is, what it means, how it is calculated, etc.

What is it?

By definition, gross margin is the resulting sales revenue after all variable costs(costs of materials and raw materials, funds spent on selling products, wages to workers, etc.).

Sometimes financiers use the term “contribution margin.” This is the same as gross margin.

This concept is not suitable to characterize a company with financial side. However, it can be used to calculate other important indicators.

One of the components of calculating gross margin is variable costs. In reality, they are considered directly proportional to the total volume of production.

Any enterprise wants to ensure that the costs it makes per unit finished products, were as low as possible. This will provide an opportunity to get high profits. Over time, variations in the direction of increasing or decreasing production volume are possible. However, their ongoing impact on one unit of finished product is constant.

The concept of gross margin is essential for financiers. It allows them to conduct an operational analysis of the enterprise.

Sometimes this term is replaced by more familiar ones - the amount of covering expenses, marginal income. It is determined by the state pricing policy.

For each area of activity, gross margin has its own meaning:

for trade - this is a markup;
in macroeconomics, this is a version of the profit that a company receives;
in finance - this is the difference in percentages, exchange rates, shares;
for banks - this is the interest difference that the bank receives as a result of issuing loans and opening deposits;
The securities market uses this concept to determine the amount of credit taken to carry out transactions.

Cost is an important concept in commerce and economics. Here you will learn what types of cost exist and how this indicator is calculated.

What does gross margin show?

According to experts, gross margin allows you to understand whether a particular enterprise is able to cover everything fixed costs for the manufacture of their products, received from the proceeds from their sale. After carrying out the calculations, the economist can make an analysis and give appropriate recommendations.

It is generally accepted that the higher the indicator obtained, the higher the profit received by the company, provided that all fixed costs taken away. The high percentage of gross margin indicates the high profit that was received from sales.

This indicator is used later to calculate another figure - the gross margin ratio.

In practice it looks like this. Let's say the company received an income of 45% for 3 months.

Then it is worth saying that she was able to save 45 kopecks from each ruble in her budget after her manufactured products were sold.

The saved amount will be used to cover wages, payment of utility and administrative costs, payments to shareholders, etc.

Gross margin has different meaning for different sectors of trade and production.

There is a relationship between this indicator and the turnover indicator of stored materials. It is inversely proportional. For example, for trading, this manifests itself as follows: the gross margin is higher in the case of low inventory turnover. If the turnover is high, then the gross margin percentage is lower.

For production, the margin figure should be even higher than in trade. This is due to the fact that the final product takes longer to reach the buyer.

Margin calculation formula

To determine this indicator, standard expressions are used:

GP = TR-TC or CM = TR – VC

In them, GP shows the gross margin;
CM – gross marginal income;
TR – shows the revenue received by the company after selling products;
T.C. full cost, which is found as follows.

TC = FC + VC,

where FC – fixed costs;
VC – variable costs.

Economists also use the expression interest margin. This indicator is used to analyze the financial condition of a particular company. It is found as follows:

GP = TC/TR or CM = VC/TR

In it, GP is the percentage margin indicator;
CM – amount of marginal income as a percentage.

The gross margin indicator is found by subtracting the costs incurred from the income received.

But the percentage indicator allows you to find out what the ratio of costs to income is as a percentage.

The resulting calculated data allows you to find the marginal income indicator. This figure makes it possible to find out the ratio of margin to revenue received. Sometimes this indicator is called the rate of return margin:

Kmd = GP/TR

There are certain normal data that every organization must know in order to obtain a positive result. Here everything depends on the type of activity of the company in question: trade – 30%, industry – 20%. If the calculated results are as required, then the company is considered profitable.

An entrepreneur must know not only how to open a company, but also how to close it, because for some reason an enterprise may cease to exist, and in this case it is necessary to take all necessary measures for its legal liquidation. : We understand the nuances.

Varieties piecework payment labor we will consider in the material. Pros and cons of piecework wages.