doing math

courses › Accounting

Margins on the P&L

level 19 course

Read each line as a percent of revenue, and spot when bigger dollars hide a worse business.

In your head, jot if needed · no calculator why?

Learn first (about 3 minutes)

Opens at level 19.

Sign in to start

Builds on: Reading a P&L (not open yet) · Percentages in Business (not open yet)

the lesson

The idea, the techniques and a tip for each skill, right here. The Learn page adds worked examples for every skill and untimed practice.

Read the lesson · about 3 minutes

The idea

A margin is a P&L line as a percent of revenue: the share of each sales dollar the business keeps at that step. Gross margin is gross profit divided by revenue. Operating margin and net margin do the same with operating profit and net income.

Margins let you compare months of different sizes. More profit dollars can still mean a weaker business, if each sales dollar keeps less. And profit does not track sales: when sales grow 20%, profit can grow faster, grow slower, or fall, depending on the margin and the costs.

Techniques

Divide by revenue

Any margin, or comparing two months.

  1. Take the profit line the question names.
  2. Divide it by revenue, never by costs, and multiply by 100.
  3. To compare months, work out both margins first.
worked example

Example: Revenue is $60,000 and gross profit is $21,000. What is the gross margin?

  1. $21,000 ÷ $60,000 = 0.35 = 35%.

Answer: 35%

Rebuild profit from the margin

Revenue, gross margin and operating expenses all change.

  1. New gross profit is new revenue times the new gross margin.
  2. Subtract the new operating expenses.
worked example

Example: Revenue rises from $20,000 to $25,000. Gross margin falls from 40% to 32%, and operating expenses rise from $4,000 to $5,000. What is the new operating profit?

  1. New gross profit: $25,000 × 0.32 = $8,000.
  2. New operating profit: $8,000 − $5,000 = $3,000.
  3. Before: $20,000 × 0.4 − $4,000 = $4,000.

Answer: $3,000

Weight by revenue

Combining the margins of two parts of a business.

  1. Turn each margin into profit dollars: revenue times the margin.
  2. Add the dollars, then divide by total revenue.
worked example

Example: A café sells $30,000 of coffee at a 70% gross margin and $10,000 of food at a 30% gross margin. What is the combined gross margin?

  1. $30,000 × 0.7 = $21,000. $10,000 × 0.3 = $3,000.
  2. ($21,000 + $3,000) ÷ $40,000 = 0.6 = 60%.

Answer: 60%

Tips by skill

  • TipMargin as a % of revenue: Divide the named profit line by revenue, then multiply by 100.
  • TipDid the margin improve?: Work out each month's margin as a percent and compare those. Bigger dollar profits can hide a smaller margin.
  • TipSales up, profit down?: New revenue times the new gross margin, minus the new operating expenses. A loss takes a minus sign.
  • TipCombined margin of two parts: Turn each margin into dollars, add them, and divide by total revenue. Never average the two percents.

Watch out for

  • Dividing by costs, or dividing revenue by profit. A margin divides a profit line by revenue.
  • Assuming a bigger dollar profit means a better margin. Compare the percents.
  • Assuming profit grows at the same rate as sales.
  • Averaging two margins without weighting by revenue.

skills · practice stats

From rounds of this course only: box, review and test-out answers are left out. Once a skill has 40 tries, it compares your first 20 tries with your last 20.

rest ladder

Win 3 of your last 4 rounds and the course rests. A win is 90% right, within 2× the round's par. Pass the review when it comes back and the next rest is longer.

  1. 1 day
  2. 3 days
  3. 7 days
  4. 14 days
  5. 30 days
  6. 60 days
  7. mastered · every 90 days

your rounds

No rounds yet.