Average Profit Margin Per Industry & How to Calculate Them
Tracking profit margins is a simple way of measuring and seeking new methods of improving the profitability of a company. This is true no matter what industry the business is in or whether it is a brick and mortar shop or an online store.
However, measuring profit margins can involve complex calculations as this financial metric involves expenses such as raw materials, labor, and transportation costs. For businesses aiming to gain a better view of their financial strengths, understanding the average profit margins by industry can be a great place to start.
Types of Profit Margins
In the world of accounting, a profit margin separates a company's earnings from its revenue, business costs, and expenses.
Simply put, it shows what amount of a businesses' revenue is actually a profit and is expressed as a percentage. It is an important calculation for businesses to know as it can reveal how much profit is made from the sale of each product or service.
There are different types of profit margins that businesses can calculate and track. Each type reveals a different aspect of a company's financial health. The four main profit margin types include-
- Gross Profit Margin
To work out the gross profit margin, businesses can subtract the cost of goods sold from the total revenue-
Gross Profit Margin = (Total Revenue Cost of Goods Sold) / Total Revenue x 100
- Operating Profit Margin
To figure out a company's operating profit margin, management can subtract the cost of goods sold and operating expenses from company revenue.
Operating Profit Margin = (Operating Income/Net Sales Revenue) x 100
- Pre-Tax Margin
Pre-Tax Profit Margin = (Earnings before taxes/Revenues) x 100
- Net Profit Margin
Net Profit Margin = (Operating Profit Interest Expenses Tax Expenses)/Revenue x 100
What is a Good Profit Margin?
Working out a company's profit margin is only useful if there is a standard to measure it against. The ideal profit margin can vary from industry to industry and is also dependent upon other unique circumstances such as location.
- Service Industries
Lawyers also have a high-profit margin with most averaging 17.4 percent. Low operating costs and the number of repeat clients contribute to the high-profit margin of attorneys.
- Real Estate
- Health Industry
While a dentist can have higher equipment costs, they often earn a 14.9 percent profit margin whereas the average physician earns 14.1 percent. Yet, outpatient care centers have average profit margins of 15.9 percent.
- Retail Industry
Furniture or home furnishing stores usually see about 3.3 percent profit margins and alcohol stores often earn 3.4 percent. E-commerce businesses can earn higher profit margins with some reaching up to 6.5 percent.
Earning a healthy profit margin is a key indicator of a businesses' financial stability. High-profit margins can also be used as annual financial objectives for some companies. However, it is important to keep things in perspective and have a good understanding of the average profit margins to avoid straying too far from industry competitors.
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