Get to Know 3 Types of Margins and How to Calculate Them

Margin is an important factor that must be understood by culinary business owners. 

It not only presents figures but also reflects the financial health and business strategies applied to your culinary venture.

In this article, we’ll delve into margins, their types, functions, and how to calculate them.

Definition of Margin

In general, margin is the difference between production costs and the selling price of a product. In the context of the culinary business, it reflects how much profit you gain from selling your products.

In other words, margins can help you understand how efficiently your culinary business manages costs and generates profit from selling food and beverages.

Read more: 5 Marketing Innovations for the Culinary Business You Can Implement!

The Function of Margin in the Culinary Business

Source: freepik

Once you understand the importance of margin, it also has useful functions for the continuity of your culinary business, such as:

1. Measuring Profitability

Culinary business owners can evaluate how profitable their products are. This helps with decision-making on pricing and also serves as a marketing strategy.

2. Cost Control

Margins can serve as a tool to control expenses. After planning the costs required to produce culinary products, you can create strategies to reduce unnecessary costs without compromising product quality.

3. Financial Planning Assistance

Knowing margin information allows you to plan finances more wisely. You can forecast future income and expenses based on the existing margin data.

Read More: 6 Alternative Strategies to Deal with the 12% VAT Increase for Culinary Businesses

Types of Margins

It’s important to know that there are several types of margins, such as:

1. Gross Margin

This is the difference between gross revenue from sales and the cost of goods sold (COGS). Here’s how to calculate it:

This type provides an initial view of the product's profitability before considering other operating expenses.

Example:
Your culinary business generates total revenue of IDR 100 million, with a COGS of IDR 40 million and operating expenses of IDR 30 million. Therefore,

2. Operating Margin

This type shows the profit percentage your business earns from core operations after subtracting operating expenses, such as employee salaries, overhead, and other operational costs. 

Here’s the formula:

The higher the operating profit margin, the more efficiently your culinary business manages operational costs and generates profits from operating income. 

Conversely, a low margin indicates challenges in generating adequate profit or an imbalance between income and operating expenses.

Example:
Your culinary business generates total revenue of IDR 100 million, with a COGS of IDR 40 million and operating expenses of IDR 30 million. Therefore,

3. Net Profit Margin

Net profit margin measures how efficiently your culinary business generates net profit from total revenue. 

This ratio shows the percentage of net profit obtained from each revenue generated by your culinary business. Here’s how to calculate it:

A higher net profit margin indicates greater efficiency in managing costs and generating net profit from revenue.

Conversely, a low margin indicates challenges in generating net profit or high cost pressures.

Example:
Your culinary business generates total revenue of IDR 100 million, with a COGS of IDR 40 million, operating expenses of IDR 30 million, and taxes of IDR 5 million. 

In the business world, especially in the culinary business, understanding margins is essential to optimize profits and plan future strategies.

By understanding the types of margins and how to calculate them, you can make better decisions for your culinary business. Regularly monitoring your margins ensures your business remains stable and grows successfully.