Margin analysis: which areas and products bring in more money
Let’s imagine that confectioner Vasya Yagodkin sells one hundred cakes with raspberries and one hundred with currants every month. Raspberry ones bring him 50,000 rubles, and currants – only 30,000 rubles. It seems that it is more profitable to score on currants and sell only raspberry cakes. The idea of \ u200b \ u200b norms, but first there are a few things to calculate.
Before we get rid of the currant cakes, we consider how much money Yagodkin spends on production, and we see: 40,000 rubles are spent on raspberry cakes, and 10,000 rubles on currant cakes. Now we need to see how much money remains after deducting production costs, Vasya has the following alignment:
raspberry cakes – 10,000 rubles;
currant – 20,000 rubles.
And let’s calculate the same as a percentage:
raspberry – 20%;
currant – 66%.
Although raspberry cakes bring more revenue, they are more expensive to bake, and as a result, much less money is left from them than after the sale of currants. It turns out that to score on currant cakes and sell only raspberry ones is such an idea.
What we calculated in rubles, in financial terms, is called margin profit – this is the difference between revenue and variable costs, and in percentage terms – marginality. Marginality shows which product is more profitable to produce and sell (in our example, currant cakes), which line of business it is time to close and where to invest money so that there are more of them.
In this article, we will teach you how to calculate the margin profit, based on it, calculate the margin and analyze all this.
What is margin profit and how to calculate it
The profit margin shows how much money the company has after the production costs, for example:
if a pastry chef bakes cakes, his marginal profit will show how much money will remain after buying the ingredients for the cake, paying for his work and the cost of utility bills for this particular cake, for example, electricity to operate the oven;
if a company builds baths, its marginal profit will show how much money is left after the wages of the builders, the purchase of wood, stoves for the baths, and so on;
if a hairdresser dyes his hair, his profit margin will show how much money is left after buying dye, gloves, dyeing collar, labor and water.
The margin profit is calculated using a simple formula:
revenue – variable costs
Variable costs are those that directly depend on revenue: if the number of orders changes, variable costs also change proportionally. For example, if a raspberry cake is ordered in a pastry shop, flour, sugar, raspberries, etc. are bought, electricity for the oven and the work of a pastry chef are paid for on piecework, and if the cake is not ordered, then it is not bought or paid – these are variable costs.
Let’s count again with another example. Let’s say a hairdresser does a complex coloring and for this he buys two types of paint, gloves, a collar and a hair mask, and also spends on water and light – all for 2,000 rubles. The client pays 7,500 rubles for staining, then:
hairdresser’s profit margin = 7500 – 2000
= 5500 rubles.
By itself, the profit margin tells us little: well, it remains with the hairdresser after spending on paint 5500 rubles, well, fine, wonderful, wonderful. Yes. But the real strength of this indicator is in comparison, that is, analysis.
What is the Difference Between Profit Margin, Marginality and Margin
Before moving on to the analysis, you need to understand the terms.
In the subject of marginality, there are two indicators: profit margin and marginality, but there is also margin, profitability on margin and margin ratio and margin ratio – all this was specially thought up to confuse entrepreneurs. Let’s unravel now.
How is it considered
Profit margin is revenue minus variable costs. Shows how much money remains with the company after purchasing all the necessary pieces to fulfill the order.
Revenue – variable costs
Revenue – 60,000 rubles
Variable costs – 40,000 rubles
60,000 – 40,000 = 20,000 ₽
Marginality – margin profit as a percentage. Shows the ratio of profit margin to revenue for a certain period. To calculate marginality, you need to know the profit margin.
Margin profit / revenue * 100%
Revenue – 60,000 rubles
Margin profit – RUB 20,000
20,000 / 60,000 * 100% = 33.3%
Margin is an abbreviated name for margin profit. That is, absolutely the same thing.
Marginality is the same as margin profit, but as a percentage. And if the marginal profit shows how many rubles of revenue remains with the entrepreneur after paying the costs of producing the goods, then the margin shows what percentage of the revenue remains.
Margin profitability, margin profitability, profit margin ratio, margin ratio are alternative names for marginality. Just different words that mean all the same marginality