Operating Margin Calculator

Operating margin from revenue, cost of sales and overheads

All three figures for the same period, excluding VAT.

Fill in the fields above and the answer appears here.

Gross profit—
Profit—
Margin—
Markup—
Cost—
Revenue—

CostProfit

The working out is shown here once the calculator has enough information.

What does operating margin measure?

Whether the business makes money, as opposed to whether the product does. It takes gross profit, subtracts the cost of keeping the doors open, and shows what is left as a share of revenue.

It falls between the two figures everyone quotes, and that position is the point. Gross margin ignores overheads and flatters almost every trading business. Net margin drags in interest and tax, which depend on how the company was financed rather than how it trades. Operating margin drops both distractions, and analysts reach for it when they want to compare two competitors honestly.

If you want one number to answer "is this a good business", this is a better candidate than either neighbour. Our net profit margin calculator handles the final step and the gross margin calculator the first.

What goes in operating expenses?

Everything that keeps the business running without scaling one for one with a sale. Premises costs: rent, business rates, service charge, utilities, cleaning. People costs: salaries, employer National Insurance, pensions, training. Then the operational bits, meaning insurance, software subscriptions, telephony, vehicles and repairs. Professional and administrative fees belong here too, along with marketing and bank charges.

Depreciation on equipment and fit-out goes in as well. No cash leaves the account that month, which is exactly why it gets forgotten, and it is still a real cost of trading.

Interest on loans stays out, and so does corporation tax. So does anything you already counted in cost of goods sold. Double-counting carriage or packaging here is the error we see most often, and it hits the margin twice on the way through.

Why does operating margin move faster than sales?

Overheads barely move in the short run, so any change in revenue lands almost wholly on the profit line. Accountants call it operating leverage. It cuts both ways and the arithmetic is worth sitting with.

A business on £500,000 of revenue, 40% gross margin, £160,000 of overheads. Gross profit £200,000, operating profit £40,000, operating margin 8%. Grow revenue by a fifth and hold the overheads: gross profit £240,000, operating profit £80,000, margin 13.3%. Twenty percent more sales, twice the profit.

Run it backwards and it is brutal. A 20% fall takes gross profit to £160,000 and operating profit to nothing at all. Businesses carrying heavy fixed costs live or die on volume, so the break-even calculator belongs open in the next tab during any planning session.

Operating margin questions

What is the operating margin formula?
Operating margin % = ((Revenue − Cost of goods sold − Operating expenses) ÷ Revenue) × 100.
What is the difference between operating margin and EBITDA margin?
EBITDA adds depreciation and amortisation back. Operating margin leaves them in, so it is the more conservative figure and the one closer to cash reality for an asset-heavy business.
Is operating margin the same as net margin?
No. Operating margin stops before interest and tax. A business with heavy borrowing can show a healthy operating margin and a weak net margin.
Where do owner drawings go?
A salary through payroll counts as an operating expense. Dividends do not, because they come out of profit after tax. Keep the treatment consistent year to year or the trend becomes meaningless.
What operating margin is good?
Around 10% to 15% is comfortable for most UK trading businesses. Retail often runs lower, software far higher. What matters more is whether the figure is rising while revenue grows.

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