Every e-commerce business owner wants to have a very good idea of how much money can be used for purchases and daily operations. Understanding the operating margin formula can be a good way to understand that, and it could help provide a lot of important insights into the entire process. With that being said, the operating profit margin is a metric that every business needs to cover, although it has some nuanced things to take into consideration!
What is operating margin, and why is it important?
The operating margin shows the residual profits that you get after you remove the cost of goods sold and your operating expenses from the total revenue. That shows you how much money can be used to operate the business, and it can provide a more insightful approach towards running your business, its costs and everything that entails.
How to calculate operating margin step by step
What you have to keep in mind when calculating the operating profit margin formula is that it’s quite easy to understand. The operating margin requires you to make a ratio between the EBIT and total revenue. Basically, the main focus here is to figure out, for each dollar you generated, how much of that is a part of the operating income?
Once you have that answer, it will be a lot easier to figure out costs and it can provide a much better set of information. With that in mind, the operating margin formula can be very effective if you are looking specifically to better understand how you manage your business and how you can eliminate unnecessary costs. That’s why the operating profit margin can be one of the most impactful metrics you can follow, since it has a lot of insight and great info for you to check out.
The difference between operating margin and net margin
A lot of misunderstanding comes from the difference between net and operating margin. Many people think it would be the same thing, but that’s not the case at all. In fact, each one of these metrics can be very impactful, yet it does focus specifically on certain features and what everything might entail.
For the operating profit margin, you withdraw COGS and operating expenses from the revenue. With the net profit margin, you take the revenue, and here you withdraw all expenses, that also includes taxes and interest. It’s also one of the preferred ways to understand how profitable your business is, and that alone can prove to be very insightful.
How to improve your operating margin?
Every business can try different ways to improve its operating margin. The most important thing is to narrow down the exact costs, and find ways to reduce them adequately.
- Try to automate tasks, it will allow you to reduce costs, while making the entire process much easier and more consistent.
- If possible, ensure that your staff always delivers the best possible output, along with an exceptional return on investment.
- Improving vendor relationships might net you better deals and a great value overall, so keep that in mind.
- Increasing your prices might help, but do that mindfully. You might be offering your competitors a pricing advantage, and it can also deter people from buying in the future.
- Bulk buying can help reduce order costs, and it could offer you the means to improve your operating margin as well.
- Increase the average order value, strategies like cross-selling or upselling could be very useful in this situation.
Strategies to reduce operational costs
Experimenting with pricing will always come in handy, because you never know what strategies could work. You can have a subscription model, or you can offer bulk discounts. Regular sales or bundles can also be a part of your strategy, and that could allow you to reduce operation costs.
How automation tools like ProfitBlue can help?
The primary focus for ProfitBlue is to help you boost your profits. It offers excellent financial reporting solutions that might help you better understand what areas of your business you can enhance or at least work upon. And if you do that, it will make it much easier to prevent financial losses.
In general, the more you focus on automation, the better it will be, and ProfitBlue is a prime example. It’s a tool that gives you excellent reports and the software itself is made by vetted industry professionals. Simple ways to automate will give you insights and help that could help streamline costs.
Conclusion
We believe it’s extremely important to keep an eye on metrics like the operating margin formula. Not only are they extremely effective, but they will offer a very good insight into how your business is doing. Knowing the operating margin will always assist you in taking the most effective business decisions, so it’s certainly a thing you have to consider!
