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Operating Margin is a financial metric that helps businesses understand their profitability by measuring the percentage of revenue left after covering the cost of goods sold (COGS) and operating expenses. In this article, we'll show how to calculate the Operating Margin, discuss its importance, and suggest strategies for improvement.
Here's the Operating Margin formula:
Operating Margin = (Operating Income / Total Revenue) x 100
Let's consider a real-world example of a retail clothing store. We'll use the following data to calculate the Operating Margin:
Calculate the Operating Income by subtracting the COGS and Operating Expenses from the Total Revenue:
Operating Income = Total Revenue - (COGS + Operating Expenses)
Operating Income = $1,000,000 - ($600,000 + $250,000)
Operating Income = $1,000,000 - $850,000
Operating Income = $150,000
Calculate the Operating Margin using the Operating Income and Total Revenue:
Operating Margin = (Operating Income / Total Revenue) x 100
Operating Margin = ($150,000 / $1,000,000) x 100
Operating Margin = 0.15 x 100
Operating Margin = 15%
In this example, the retail clothing store has an Operating Margin of 15%, which means that it retains 15% of its revenue after covering the cost of goods sold and operating expenses.
Understanding Operating Margin is essential for several reasons, which can be summarized in three core points:
Here are some strategies that can help improve your Operating Margin:
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