What margin is considered good? Margin in simple words

Trade has always played a significant role in the development of human society, being the engine of progress and an indicator of living standards. Nowadays, a person who does not know basic economic terminology may be considered simply illiterate.

Of course, it is not at all necessary to know all the intricacies of economics by heart, but it will be useful for any modern person to navigate its basic concepts and terms. Recently, in everyday life you can increasingly come across the not very familiar term “margin”.

Many people, whose occupation is far from economics, ask the question: what is margin and where is it applied?

Word "margin" came to us from the French language; French margin translated into Russian as “difference, advantage.” Having entered international economic terminology, this word, with minor changes, was borrowed by many languages of the world, primarily by European languages.

In different areas of economic activity, the word “margin” has slightly different meanings, the main ones of which we will consider below.

It should be immediately clarified: the concept of margin that exists in modern Russia differs from the European understanding of this term. In Europe, margin is expressed as a percentage and is the ratio of the profit from the sale of a particular product to the selling price of that product.

This value is used for a relative assessment of the efficiency of the company's trading activities. In Russia, it is customary to call margin, that is, profit from the sale of a product minus its cost and overhead costs.

In exchange activities, the term “margin” means a kind of collateral that allows you to operate large sums of money. Margin in Forex is inextricably linked with the so-called “leverage”; Margin allows you to carry out transactions that require more funds than the amount available in your cash account.

By depositing a certain margin, the exchange client receives at his disposal an amount determined by his leverage. So, for example, with a leverage of 1:100, to complete a transaction for 100,000 monetary units, it is enough to deposit a margin of 1,000 units.

Margin trading on Forex assumes that the trader undertakes to carry out a reverse transaction for the same amount of currency after some time (if the first was the purchase of a certain currency, then it must be followed by its sale, and vice versa).

After the first operation, the trader is deprived of the opportunity to freely dispose of the proceeds; profit can only be made after performing the reverse operation. In the event of a losing trade, the margin is retained to cover losses.

Exchange margin is a rather specific term; a simpler and more common concept is trading margin. However, even regarding trading margins, there are a number of misconceptions among non-professionals. One such misconception is that margin is often confused with markup.

In fact, understanding the difference between these concepts is quite simple. Margin is the ratio of profit to the market price of a product, while markup is the ratio of profit to cost.

Let's give a simple example. Let's say a product was purchased for 100 and sold for 150 monetary units. Calculating the markup in this case is not difficult at all: (150-100)/100=0.5 (50%). That is, the markup is 50% of the cost of the product. Now let's calculate the margin: (150-100)/150=0.33 (33.3%). The margin was 33.3% of the market value of the product.

As mentioned above, in Russia and Europe the term “margin” is usually understood somewhat differently. We have already considered the European method of calculating margin.

In Russia, margin is understood as net profit, therefore, in the terminology familiar to Russians, there is no difference between margin and profit. It should be remembered that in this case we are talking specifically about profit, and not about trade margins.

The trade margin is the difference between the selling price and the cost of the goods, and overhead costs are taken into account when calculating profit.

The concept of markup and margin (people also say “gap”) similar to each other. They are easy to confuse. Therefore, first we will clearly define the difference between these two important financial indicators.

We use markup to set prices, and margin to calculate net profit from total income. In absolute terms, the markup and margin are always the same, but in relative (percentage) terms they are always different.

Formulas for calculating margins and markups in Excel

A simple example to calculate margin and markup. To implement this task, we need only two financial indicators: price and cost. We know the price and cost of the product, but we need to calculate the markup and margin.

Formula for calculating margin in Excel

Create a table in Excel, as shown in the figure:

In the cell under the word margin D2, enter the following formula:

As a result, we get an indicator of the volume of margin, for us it was: 33.3%.

Formula for calculating markup in Excel

Move the cursor to cell B2, where the result of the calculations should be displayed, and enter the formula into it:

As a result, we obtain the following markup percentage: 50% (easy to check 80+50%=120).

The difference between margin and markup using an example

Both of these financial ratios consist of profits and expenses. What is the difference between markup and margin? And their differences are very significant!

These two financial ratios differ in the way they are calculated and the results in percentage terms.

Markups allow businesses to cover costs and make a profit. Without it, trade and production would go into minus. And the margin is the result after the markup. For a clear example, let’s define all these concepts with the formulas:

Product price = Cost + Markup.
Margin is the difference between price and cost.
Margin is the share of profit that the price contains, so the margin cannot be 100% or more, since any price also contains a share of the cost.

The markup is the part of the price that we added to the cost.

Margin is the portion of the price that remains after subtracting the cost.

For clarity, let’s translate the above into formulas:

N=(Ct-S)/S*100;
M=(Ct-S)/Ct*100.

Description of indicators:

N – markup indicator;
M – margin indicator;
Ct – product price;
S – cost.

If we calculate these two indicators in numbers then: Markup = Margin.

And if in percentage terms, then: Markup > Margin.

Please note that the markup can be as high as 20,000%, and the margin level can never exceed 99.9%. Otherwise, the cost will be = 0r.

All relative (percentage) financial indicators allow you to display their dynamic changes. Thus, changes in indicators in specific periods of time are monitored.

They are proportional: the higher the markup, the greater the margin and profit.

This gives us the opportunity to calculate the values of one indicator if we have the values of the second. For example, markup indicators allow you to predict real profit (margin). And vice versa. If the goal is to reach a certain profit, you need to figure out what markup to set that will lead to the desired result.

Let's summarize before practice:

for margin we need indicators of sales amount and markup;
For the markup we need the sales amount and the margin.

How to calculate the margin as a percentage if we know the markup?

For clarity, let's give a practical example. After collecting reporting data, the company received the following indicators:

Sales volume = 1000
Markup = 60%
Based on the data obtained, we calculate the cost (1000 - x) / x = 60%

Hence x = 1000 / (1 + 60%) = 625

Calculate the margin:

1000 - 625 = 375
375 / 1000 * 100 = 37,5%

This example follows the formula for calculating margin for Excel:

How to calculate the markup as a percentage if we know the margin?

Sales reports for the previous period showed the following indicators:

Sales volume = 1000
Margin = 37.5%
Based on the data obtained, we calculate the cost (1000 - x) / 1000 = 37.5%

Hence x = 625

We calculate the markup:

1000 - 625 = 375
375 / 625 * 100 = 60%

An example of an algorithm for calculating a markup formula for Excel:

Note. To check formulas, press the key combination CTRL+~ (the “~” key is located before the one) to switch to the corresponding mode. To exit this mode, press again.

One of the most commonly used terms in macroeconomics is margin. Translated from English, the word margin means “difference”. What exactly is this term called and what is it used for? We will try to talk about this as clearly as possible.

Introduction

If you turn to Wikipedia, you can find out that margin is the difference between the company’s revenue and the total cost of production. This indicator is absolute; it reflects the overall success of the company in its main and additional activities.

Margin is the difference between revenue and cost of goods

The absolute nature of this indicator allows it to be used only for internal statistics and analysis, so it is not possible to compare branches or companies by margin. To do this, you should use relative indicators, for example, profitability.

What is classic margin?

In micro/macroeconomics, gross profit is the profit that was received taking into account the full revenue and total costs of providing the service/creating the product. This term most closely matches the Russian term “total profit received from the sale of all kinds of services or finished goods.”

Note: The concept of marginal income denotes the difference from the revenue received by the enterprise to the total variable costs of providing a service or producing a product.

When the expression “margin” is used in the financial field, it usually means the difference in interest rates or different securities. Banks also use this concept - for them it means the difference between deposits and loans issued.

Let's look at what margin is in trading and what it depends on. In trade, this concept refers to the amount of interest that is added to the purchase price to make a profit. In any case, the result of the activities of all enterprises is to obtain the maximum margin or profit.

Margin is one of the determining factors in pricing. Meanwhile, not every aspiring entrepreneur can explain the meaning of this word. Let's try to rectify the situation.

The concept of “margin” is used by specialists from all spheres of the economy. This is, as a rule, a relative value, which is an indicator. In trade, insurance, and banking, margin has its own specifics.

How to calculate margin

Economists understand margin as the difference between a product and its selling price. It serves as a reflection of the effectiveness of business activities, that is, an indicator of how successfully the company converts into.

Margin is a relative value expressed as a percentage. The margin calculation formula is as follows:

Profit/Revenue*100 = Margin

Let's give a simple example. It is known that the enterprise margin is 25%. From this we can conclude that every ruble of revenue brings the company 25 kopecks of profit. The remaining 75 kopecks relate to expenses.

What is gross margin

When assessing the profitability of a company, analysts pay attention to gross margin - one of the main indicators of a company's performance. Gross margin is determined by subtracting the cost of manufacturing a product from the revenue from its sale.

Knowing only the size of the gross margin, one cannot draw conclusions about the financial condition of the enterprise or evaluate a specific aspect of its activities. But using this indicator you can calculate other, no less important ones. In addition, gross margin, being an analytical indicator, gives an idea of the company's efficiency. The formation of gross margin occurs through the production of goods or provision of services by the company's employees. It is based on work.

It is important to note that the formula for calculating gross margin takes into account income that does not result from the sale of goods or the provision of services. Non-operating income is the result of:

writing off debts (receivables/creditors);
measures to organize housing and communal services;
provision of non-industrial services.

Once you know the gross margin, you can also know the net profit.

Gross margin also serves as the basis for the formation of development funds.

When talking about financial results, economists pay tribute to the profit margin, which is an indicator of the profitability of sales.

Profit Margin- this is the percentage of profit in the total capital or revenue of the enterprise.

Margin in banking

Analysis of the activities of banks and the sources of their profits involves the calculation of four margin options. Let's look at each of them:

1. Banking margin, that is, the difference between loan and deposit rates.
2. Credit margin, or the difference between the amount fixed in the contract and the amount actually issued to the client.
3. Guarantee margin– the difference between the value of the collateral and the amount of the loan issued.
4. Net interest margin (NIM)– one of the main indicators of the success of a banking institution. To calculate it, use the following formula:
NIM = (Fees and Fees) / Assets
When calculating the net interest margin, all assets without exception can be taken into account or only those that are currently in use (generating income).

Margin and trading margin: what is the difference

Oddly enough, not everyone sees the difference between these concepts. Therefore, one is often replaced by another. To understand the differences between them once and for all, let’s remember the formula for calculating margin:

Profit/Revenue*100 = Margin

(Sales price – Cost)/Revenue*100 = Margin

As for the formula for calculating the markup, it looks like this:

(Selling price – Cost)/Cost*100 = Trade margin

For clarity, let's give a simple example. The product is purchased by the company for 200 rubles and sold for 250.

So, here is what the margin will be in this case: (250 – 200)/250*100 = 20%.

But what will be the trade margin: (250 – 200)/200*100 = 25%.

The concept of margin is closely related to profitability. In a broad sense, margin is the difference between what is received and what is given. However, margin is not the only parameter used to determine efficiency. By calculating the margin, you can find out other important indicators of the enterprise’s economic activity.

Margin (English margin - difference, advantage) is one of the types of profit, an absolute indicator of the functioning of an enterprise, reflecting the result of primary and additional activities.

Unlike relative indicators (for example, ), margin is necessary only for analyzing the internal situation in the organization, this indicator does not allow comparing several companies with each other. In general terms, margin reflects the difference between two economic or financial indicators.

What is margin

Margin in trading– this is a trade margin, a percentage added to the price to obtain the final result.

What mark-up and margin are in trading, as well as how they differ and what you should pay attention to when talking about them, is clearly explained in the video:

IN microeconomics margin(grossprofit - GP) - a type of profit that reflects difference between revenue and costs for manufactured products, work performed and services provided, or the difference between the price and the cost of a unit of goods. This type of profit coincides with the indicator “ profit from sales».

Also within economics of the company allocate marginal income(contribution margin - CM) is another type of profit that shows the difference between revenue and variable costs. This type of profit helps to draw conclusions about the share of variable costs in revenue.

IN financial sector under the term " margin» refers to the difference in interest rates, exchange rates and securities and interest rates. Almost all financial transactions are aimed at obtaining margin - additional profit from these differences.

For commercial banks margin– this is the difference between the interest on loans issued and deposits used. Margin and marginal income can be measured both in value terms and as a percentage (the ratio of variable costs to revenue).

On securities market under margin refers to collateral that can be left to obtain a loan, goods and other valuables. They are necessary for transactions on the securities market.

A margin loan differs from a traditional loan in that the collateral is only a portion of the loan amount or the proposed transaction amount. Typically the margin is up to 25% of the loan amount.

Margin also refers to the advance of cash provided when purchasing futures.

Gross and percentage margin

Another name for marginal income is the concept of “ gross margin"(grossprofit – GP). This indicator reflects the difference between revenue and total or variable costs. The indicator is necessary for analyzing profit taking into account cost.

Interest margin shows the ratio of total and variable costs to revenue (income). This type of profit reflects the share of costs in relation to revenue.

Revenue(TR– total revenue) – income, the product of the unit price and the volume of production and sales. Total costs (TC – totalcost) – cost price, consisting of all costing items (materials, electricity, wages, etc.).

Cost price are divided into two types of costs - fixed and variable.

TO fixed costs(FC – fixed cost) include those that do not change when capacity (production volume) changes, for example, depreciation, director’s salary, etc.

TO variable costs(VC – variable cost) include those that increase/decrease due to changes in production volumes, for example, the earnings of key workers, raw materials, materials, etc.

Margin - calculation formula

Gross Margin

GP=TR-TC or CM=TR-VC

where GP is gross margin, CM is gross marginal income.

Interest margin calculated using the following formula:

GP=TC/TR orCM=VC/TR,

where GP is interest margin, CM is interest margin income.

where TR is revenue, P is the price of a unit of production in monetary terms, Q is the number of products sold in physical terms.

TC=FC+VC, VC=TC-FC

where TC is the total cost, FC is fixed costs, VC is variable costs.

Gross margin is calculated as the difference between income and costs, percentage margin is calculated as the ratio of costs to income.

After calculating the margin value, you can find contribution margin ratio, equal to the ratio of margin to revenue:

K md =GP/TR or K md =CM/TR,

where K md is the marginal income coefficient.

This indicator K md reflects the share of margin in the total revenue of the organization, it is also called rate of marginal income.

For industrial enterprises the margin rate is 20%, for retail enterprises – 30%. In general, the marginal income coefficient is equal to profitability of sales(by margin).

Video - profitability of sales, the difference between margin and markup: