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While you are not expected to calculate your profit margins for this program, it is important to have an understanding of how to do so. As outlined previously, you need to know your costs in order to set your price at a rate where you can make a profit. There are standards within industries, and you researched price standards in your industry to make sure you were within this range at a minimum.

Once you know the industry standards, you can set your price and target your profitability according to one of 3 methods:


These terms often get used interchangeably, which is not accurate. Mark-up does not equal margin or profit. Let’s review the definitions of these terms.

 

By contrast, fixed costs remain relatively stable over time, e.g. rent, payroll, utilities, insurance, etc. regardless of the sales volume.

Net Income in this case is revenue/sales minus the variable costs of your business; do not include fixed costs in the calculation to arrive at net income.

Operating margin gives an idea of how much a company makes (before interest and taxes) on each dollar of sales. For instance, if a company has an operating margin of 12%, this means that it makes $0.12 (before interest and taxes) for every dollar of sales.

 

 


Activity

Open the Forecasting Worksheet and save Part D: Margin Projections and calculate a Mark-Up, Gross Margin and Operating Margin for Year 1 sales and expenses for future reference.