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For the favorable life of the company and the effective functioning of all its financial processes, it is necessary to have all the information on the income, expenses and costs of the company.
Often, various pricing factors are called profit in the same word and lumped together. Let's take a closer look at two such coefficients - margin and markup.
What is margin and markup
Most people believe that there is no difference between margin and markup and often confuse or combine their indicators. Our article will help you understand the difference between markup and margin.
Margin
Economics textbooks present several definitions of margin, and there are even more on the Internet. Let's consider one of them.
Margin is the difference between the final price of a product and its cost.
Expressed as a percentage of the final price for which the product was sold or as the difference in profit per unit of product. First of all, margin is an indicator of profitability.
This term is used not only in trading, but also in stock exchange, banking and insurance practice.
In general usage, the word margin refers to the difference between indicators.
In order to obtain information about financial activities enterprises calculate the following concepts:
Marginal income is one of the types of profit that shows the difference between revenue and variable costs. Necessary for drawing conclusions about the share of variable costs in revenue.
Gross margin is the ratio of revenue and fixed or variable costs. Used to analyze profits taking into account costs.
The concept of gross margin differs in Russia and Europe, due to the characteristics financial systems. In Russia, this is the profit received by the company during the sale of products, as well as variable costs for the purchase of raw materials, production, storage and delivery of goods. Calculated using the following formula:
Gross margin = Income received from sales of products – Costs of production, storage, etc.
To obtain information about the current financial condition of organizations, this indicator is calculated.
In European countries, gross margin is the percentage of the company's total profit from sales of products, after paying all mandatory cash costs.
Interest margin is the ratio of general and variable costs to revenue.
Margin is usually calculated at the end of the reporting period - month or quarter. Companies that are confident in the market make payments once at the end of the year.
The profitability of a product is reflected by such an indicator as margin. It is calculated to determine the magnitude of sales growth and for the most effective pricing management.
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Extra charge
Let's move on to defining the markup. It is used to name several quantities:
- The amount added to the original cost of a product when it is sold.
- Retailer profit.
- The difference between the retail and wholesale cost of products.
The markup can be specified in the contract if the supplier (manufacturer) goes to additional conditions intermediary (buyer).
Established to cover the costs of production, storage and delivery of products.
Its value is set by the end seller, based on the current state of the market, the presence of competitors and the level of demand for the products sold.
Important to consider competitive advantages both the product on the market and the selling organization.
To determine the correct markup, carefully calculate the costs your company incurs. Consider everything: costs of raw materials, production, storage, delivery of goods, and remuneration of employees.
Depending on the sales volume, the markup may vary: for large volumes, the final price is low, for small volumes, the final price is high. For getting highest profit, it is necessary to determine the added value of products that helps maintain a balance between sales volume and product prices.
Correctly established added value covers the funds spent on a unit of goods and brings profit above these costs. This factor makes it clear how much profit is received from the invested funds.
Remember, that current legislature The Russian Federation does not limit most products maximum size added value, and leaves it to the company to determine this indicator itself.
These are food products for children, medical products, medications, catering products in schools, colleges and universities, goods that are sold in the regions of the Far North.
The difference between margin and markup: calculating indicators
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Margin = (Final cost of goods – Cost of goods) / Final cost of goods * 100%
Markup = (Final cost of goods – Cost of goods) / Cost of goods * 100%
Let's look at a clear example:
The cost of the product is 50.
The final price of the product is 80.
We get:
Margin = (80 – 50) / 80 * 100% = 37.5%
Markup = (80 – 50) / 50 * 100% = 60%
From the calculations it follows that the margin is the total profit of the company, after deducting all necessary expenses, and the markup is the added cost to the cost.
If at least one of these factors is known, then the second can be calculated:
Markup = Margin / (100 – Margin) * 100%
Margin = Markup / (100 + Markup) * 100%
Let’s take a margin equal to 25 as a condition, and a markup of 20, it turns out:
Markup = 20 / (100 – 20) * 100% = 25
Margin = 25 / (100 + 25) * 100% = 20
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The difference between margin and markup
The margin cannot be 100%, but the added value can.
Margin is an indicator of income after covering mandatory costs. Markup is an additional price for a product.
The calculation of the margin depends on the total profit of the enterprise, and the markup - on the original cost of the goods.
The higher the markup, the higher the margin, but the second factor is always lower than the first.
Finally
The financial activities of the enterprise are most important element his existence.
It is necessary to carry out all the calculations that will help find weak points in the budget and take the right path in pricing.
It is important to know what margin and markup are and how they differ from each other. These indicators are an effective analysis tool financial condition enterprises.
Now you know, if your competitors say: “Our company operates with a margin of 150%,” then they do not distinguish between markup and margin. Therefore, you already have one advantage over them.
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Source: http://lady-investicii.ru/articles/biznes/otlichiya-marzhi-ot-naczenki.html
What is margin and how to calculate it? Detailed overview of the concept for beginners + calculation formulas
03/17/2017 To the procurement participant
Hello, dear colleague! In today's article we will talk about such a well-known economic term as margin.
Many novice entrepreneurs, as well as procurement participants, have no idea what it is and how it is calculated.
This term has different meanings depending on the area in which it is used.
Therefore, in this article we will look at the most common types of margin and dwell in detail on margin in trading, because It is this that is of greatest interest to suppliers participating in government and commercial tenders.
1. What is margin in simple words?
The term “margin” is most often found in areas such as trading, stock trading, insurance and banking. Depending on the field of activity in which this term is used, it may have its own specifics.
Margin(from the English Margin - difference, advantage) - the difference between the prices of goods, rates valuable papers, interest rates and other indicators. Such a difference can be expressed both in absolute values (for example, ruble, dollar, euro) and in percentages (%).
In simple words margin in trade is the difference between the cost of a product (the cost of its manufacture or purchase price) and its final (selling) price. Those. this is some kind of performance indicator economic activity a specific company or entrepreneur.
IN in this case This is a relative value, expressed in % and determined by the following formula:
M = P/D * 100%,
P - profit, which is determined by the formula:
P = selling price - cost
D - income (selling price).
In industry, the margin rate is 20% , and in trade – 30% .
However, I would like to note that the margin in our and Western understanding is very different. For European colleagues, it is the ratio of profit from the sale of a product to its selling price. We use for calculations net profit, namely (selling price - cost).
2. Types of margin
IN this section In this article we will look at the most common types of margin. So let's get started...
2.1 Gross margin
Gross Margin Gross margin is the percentage of a company's total revenue that it retains after incurring direct costs associated with the production of its goods and services.
Gross margin is calculated using the following formula:
VM = (VP/OP) *100%,
VP - gross profit, which is defined as:
VP = OP - SS
OP - sales volume (revenue);
CC - cost of goods sold;
Thus, the higher the company’s VM indicator, the more funds the company saves for each ruble of sales to service its other expenses and obligations.
The ratio of VM to the amount of revenue from the sale of goods is called the gross margin ratio.
2.2 Profit margin
There is another concept that is similar to gross margin. This concept is profit margin. This indicator determines the profitability of sales, i.e. profit share in total volume company revenue.
2.3 Variation margin
Variation margin- the amount paid/received by a bank or a participant in trading on an exchange in connection with a change in the monetary obligation for one position as a result of its adjustment by the market.
This term is used in exchange activities. In general, there are a lot of calculators for stock traders to calculate margin. You can easily find them on the Internet using this search query.
2.4 Net interest margin (bank interest margin)
Net interest margin- one of the key indicators for assessing the efficiency of banking activities. NIM is defined as the ratio of the difference between interest (commission) income and interest (commission) expenses to the assets of a financial organization.
The formula for calculating net interest margin is as follows:
NPM = (DP - RP)/BP,
DP - interest (commission) income; RP - interest (commission) expenses;
AD - income-generating assets.
As a rule, NIM indicators financial institutions can be found in open sources. This indicator is very important for assessing the stability of a financial organization when opening an account with it.
2.5 Security margin
Guarantee Margin- this is the difference between the value of the collateral and the amount of the loan issued.
2.6 Credit margin
Credit margin- the difference between the estimated value of a product and the amount of credit (loan) issued by a financial institution for the purchase of this product.
2.7 Bank margin
Bank margin(bank margin) is the difference between credit and deposit interest rates, credit rates for individual borrowers, or interest rates on active and passive transactions.
The BM indicator is influenced by the terms of loans issued, the shelf life of deposits (deposits), as well as interest on these loans or deposits.
2.8 Front and back margin
These two terms should be considered together because they are connected to each other
Front margin is the profit from the markup, and back margin is the profit received by the company from discounts, promotions and bonuses.
3. Margin and profit: what's the difference?
Some experts are inclined to believe that margin and profit are equivalent concepts. However, in practice these concepts differ from each other.
Margin is the difference between indicators, and profit is the final financial results. The profit calculation formula is given below:
Profit = B – SP – CI – UZ – PU + PP – VR + VD – PR + PD
B - revenue; SP - cost of production; CI - commercial costs; LM - management costs; PU - interest paid; PP - interest received; VR - unrealized expenses; UD - unrealized income; PR - other expenses;
PD - other income.
After this, income tax is charged on the resulting value. And after deducting this tax it turns out - net profit.
To summarize all of the above, we can say that when calculating the margin, only one type of cost is taken into account - variable costs, which are included in the cost of production. And when calculating profit, all expenses and income that the company incurs in the production of its products (or provision of services) are taken into account.
4. What is the difference between margin and markup?
Very often, margin is mistakenly confused with trading margin. Extra charge- the ratio of profit from the sale of a product to its cost. To avoid any more confusion, remember one simple rule:
Let's get on specific example Let's try to determine the difference.
Suppose you purchased a product for 1000 rubles and sold it for 1500 rubles. Those. the size of the markup in our case was:
H = (1500-1000)/1000 * 100% = 50%
Now let's determine the margin size:
M = (1500-1000)/1500 * 100% = 33.3%
For clarity, the relationship between margin and markup indicators is shown in the table below:
In order to better understand the difference between these two concepts, I suggest you watch a short video:
5. Conclusion
As you can already understand, margin is an analytical tool for assessing the performance of a company (with the exception of stock trading).
And before increasing production, bring it to market new product or service needs to estimate the initial margin value.
If you increase the selling price of a product, but the margin does not increase, then this only means that the cost of its production is also increasing. And with such dynamics, there is a risk of being at a loss.
That's probably all. Hopefully, you now have the necessary understanding of what margin is and how it is calculated.
Source: http://zakupkihelp.ru/uchastniku-zakupok/chto-takoe-marzha.html
What is margin
Many people come across the concept of “margin,” but often do not fully understand what it means. We will try to correct the situation and give an answer to the question of what margin is in simple words, and we will also look at what types there are and how to calculate it.
Margin concept
Margin (eng. margin - difference, advantage) is an absolute indicator that reflects how the business operates.
Sometimes you can also find another name - gross profit. Its generalized concept shows what the difference is between any two indicators.
For example, economic or financial.
Important! If you are in doubt about whether to write walrus or margin, then know that from a grammatical point of view you need to write it with the letter “a”.
This word is used in a variety of areas. It is necessary to distinguish what margin is in trading, on stock exchanges, in insurance companies and banking institutions.
This term is used in many areas of human activity - there is a large number of its varieties. Let's look at the most widely used ones.
Gross Profit Margin
Gross or gross margin is the percentage of total revenue remaining after variable costs.
Such costs may be the purchase of raw materials for production, payment of wages to employees, spending money on marketing goods, etc.
She characterizes general work enterprise, determines its net profit, and is also used to calculate other quantities.
Operating profit margin
Operating margin is the ratio of a company's operating profit to its income. It indicates the percentage of revenue that remains with the company after taking into account the cost of goods, as well as other related expenses.
Important! High indicators indicate good performance of the company. But be on the lookout because these numbers can be manipulated.
Net Profit Margin
Net margin is the ratio of a company's net profit to its revenue. It displays how many monetary units of profit the company receives from one monetary unit of revenue. After calculating it, it becomes clear how successfully the company copes with its expenses.
It should be noted that the value of the final indicator is influenced by the direction of the enterprise. For example, companies operating in the field retail, usually have fairly small numbers, and large ones manufacturing enterprises have quite high numbers.
Interest
Interest margin is one of the important indicators of a bank’s performance; it characterizes the ratio of its income and expense parts. It is used to determine the profitability of loan transactions and whether the bank can cover its costs.
This variety can be absolute or relative. Its value can be influenced by inflation rates, various types of active operations, the relationship between the bank’s capital and resources attracted from outside, etc.
Variational
Variation margin (VM) is a value that indicates the possible profit or loss for trading platforms. It is also the number by which the amount of money taken as collateral may increase or decrease during trade deal.
If the trader correctly predicted the market movement, then this value will be positive. In the opposite situation it will be negative.
When the session ends, the running VM is added to the account or, vice versa, canceled.
If a trader holds his position for only one session, then the results of the trade transaction will be the same as the VM.
And if a trader holds his position for a long time, it will be added to daily, and ultimately its performance will not be the same as the outcome of the transaction.
Watch a video about what margin is:
Margin and Profit: What's the Difference?
Most people tend to think that the concepts of “margin” and “profit” are identical, and cannot understand the difference between them. However, even if it is insignificant, the difference is still present, and it is important to understand it, especially for people who use these concepts every day.
Recall that margin is the difference between a company's revenue and the cost of the goods it produces. To calculate it, only variable costs are taken into account without taking into account the rest.
Profit is the result of a company’s financial activities at the end of a certain period. That is, these are the funds that remain with the enterprise after taking into account all the costs of production and marketing of goods.
In other words, the margin can be calculated this way: subtract the cost of the product from the revenue. And when profit is calculated, in addition to the cost of the goods, they also take into account various costs, costs of operating the business, interest paid or received, and other types of expenses.
By the way, such words as “back margin” (profit from discounts, bonuses and promotional offers) and “front margin” (profit from markups) are associated with profit.
What is the difference between margin and markup?
To understand the difference between margin and markup, you must first clarify these concepts. If everything is already clear with the first word, then with the second it is not entirely clear.
The markup is the difference between the cost price and the final price of the product. In theory, it should cover all costs: production, delivery, storage and sales.
Therefore, it is clear that the markup is an addition to the cost of production, and the margin does not take this cost into account during calculation.
- To make the difference between margin and markup more clear, let’s break it down into several points:
- Different difference. When calculating the markup, they take the difference between the cost of goods and the purchase price, and when calculating the margin, they take the difference between the company’s revenue after sales and the cost of goods.
- Maximum volume. The markup has almost no restrictions, and it can be at least 100, at least 300 percent, but the margin cannot reach such figures.
- Basis of calculation. When calculating the margin, the company's income is taken as the base, and when calculating the markup, the cost is taken.
- Correspondence. Both quantities are always directly proportional to each other. The only thing is that the second indicator cannot exceed the first.
Margin and markup are quite common terms used not only by specialists, but also by ordinary people in everyday life, and now you know what their main differences are.
Margin calculation formula
Gross Margin reflects the difference between revenue and total costs. The indicator is necessary for analyzing profit taking into account cost and is calculated using the formula:
GP = TR - TC
Similarly, the difference between revenue and variable costs will be called Marginal income and is calculated by the formula:
CM = TR - VC
Gross Margin Ratio, equal to the ratio of gross margin to the amount of sales revenue:
KVM = GP / TR
Likewise Marginal Income Ratio equal to the ratio of marginal income to the amount of sales revenue:
KMD = CM/TR
It is also called the contribution margin rate. For industrial enterprises The margin rate is 20%, for trading – 30%.
Interest margin shows attitude total costs to revenue (income).
GP = TC/TR
or variable costs to revenue:
CM=VC/TR
Margin in various areas
As we already mentioned, the concept of “margin” is used in many areas, and this may be why it can be difficult for an outsider to understand what it is. Let's take a closer look at where it is used and what definitions it gives.
In economics
Economists define it as the difference between the price of a product and its cost. That is, this is actually its main definition.
Important! In Europe, economists explain this concept as the percentage rate of the ratio of profit to product sales at the selling price and use it to understand whether the company’s activities are effective.
In general, when analyzing the results of a company's work, the gross variety is most used, because it is it that has an impact on the net profit, which is used for further development enterprises by increasing fixed capital.
In banking
In banking documentation you can find such a term as credit margin. When a loan agreement is concluded, the amount of goods under this agreement and the amount actually paid to the borrower may be different. This difference is called credit.
When applying for a secured loan, there is a concept called the guarantee margin - the difference between the value of the property issued as collateral and the amount of funds issued.
Almost all banks lend and accept deposits. And in order for the bank to make a profit from this type of activity, different interest rates are set. The difference between the interest rate on loans and deposits is called the bank margin.
In exchange activities
On exchanges they use a variation variety. It is most often used on futures trading platforms.
From the name it is clear that it is changeable and cannot have the same meaning.
It can be positive if the trades were profitable, or negative if the trades turned out to be unprofitable.
Thus, we can conclude that the term “margin” is not so complicated. Now you can easily calculate using the formula its various types, marginal profit, its coefficient, and most importantly, you have an idea in which areas this word is used and for what purpose.
Default. What are its consequences for the economy and people of our country?
Let's look at it in a separate article.
Beneficiaries or true owners of the business, who are they?
Source: http://svoedelo-kak.ru/finansy/marzha.html
Margin is the difference between... Economic terms. How to calculate margin
Economic terms are often ambiguous and confusing.
The meaning inherent in them is intuitively clear, but to explain it in publicly accessible words, without preliminary preparation, rarely does anyone succeed. But there are exceptions to this rule.
It happens that a term is familiar, but upon in-depth study it becomes clear that absolutely all its meanings are known only to a narrow circle of professionals.
Everyone has heard, but few people know
Let’s take the term “margin” as an example. The word is simple and, one might say, ordinary. Very often it is present in the speech of people who are far from economics or stock trading.
Most believe that margin is the difference between any similar indicators. In daily communication, the word is used in the process of discussing trading profits.
Few people know absolutely all the meanings of this fairly broad concept.
However, a modern person needs to understand all the meanings of this term, so that at an unexpected moment “not to lose face.”
Margin in economics
Economic theory says that margin is the difference between the price of a product and its cost. In other words, it reflects how effectively the activities of the enterprise contribute to the transformation of income into profit.
Margin is a relative indicator and is expressed as a percentage.
Margin=Profit/Revenue*100.
The formula is quite simple, but in order not to get confused at the very beginning of studying the term, let's consider a simple example. The company operates with a margin of 30%, which means that in every ruble earned, 30 kopecks constitute net profit, and the remaining 70 kopecks are expenses.
Gross Margin
In analyzing the profitability of an enterprise, the main indicator of the result of the activities carried out is the gross margin. The formula for calculating it is the difference between revenue from sales of products during the reporting period and variable costs for the production of these products.
The level of gross margin alone does not allow for a full assessment of the financial condition of the enterprise. Also, with its help, it is impossible to fully analyze individual aspects of its activities.
This is an analytical indicator. It demonstrates how successful the company is as a whole.
Gross margin is created by the labor of the enterprise's employees spent on producing products or providing services.
It is worth noting one more nuance that must be taken into account when calculating such an indicator as “gross margin”.
The formula can also take into account income outside of sales economic activity enterprises.
These include writing off accounts receivable and payable, providing non-industrial services, income from housing and communal services, etc.
It is extremely important for an analyst to correctly calculate the gross margin, since this indicator forms the net profit of the enterprise, and subsequently development funds.
IN economic analysis There is another concept similar to gross margin, it is called “profit margin” and shows the profitability of sales. That is, the share of profit in total revenue.
Banks and margin
Bank profit and its sources demonstrate a number of indicators. To analyze the work of such institutions, it is customary to calculate as many as four different margin options:
- Credit margin is directly related to work under loan agreements and is defined as the difference between the amount specified in the document and the amount actually issued.
- Bank margin is calculated as the difference between interest rates on loans and deposits.
- Net interest margin is key indicator efficiency of banking activities. The formula for calculating it looks like the ratio of the difference in commission income and expenses for all operations to all bank assets. Net margin can be calculated based on all the bank’s assets, or only on those currently involved in work.
- The guarantee margin is the difference between the estimated value of the collateral property and the amount issued to the borrower.
Such different meanings
Of course, economics does not like discrepancies, but in the case of understanding the meaning of the term “margin” this happens. Of course, on the territory of the same state, all analytical reports are completely consistent with each other.
However, the Russian understanding of the term “margin” in trade is very different from the European one. In the reports of foreign analysts, it represents the ratio of profit from the sale of a product to its selling price.
In this case, the margin is expressed as a percentage. This value is used for relative efficiency assessment trading activities companies.
It is worth noting that the European attitude towards margin calculation is fully consistent with the basics economic theory, which were written above.
In Russia, this term is understood as net profit. That is, when making calculations, they simply replace one term with another.
For the most part, for our compatriots, margin is the difference between revenue from the sale of a product and overhead costs for its production (purchase), delivery, and sales. It is expressed in rubles or other currency convenient for settlements.
It can be added that the attitude towards margin among professionals is not much different from the principle of using the term in everyday life.
How does margin differ from trading margin?
There are a number of common misconceptions about the term “margin”. Some of them have already been described, but we have not yet touched on the most common one.
Most often, the margin indicator is confused with the trading margin. It's very easy to tell the difference between them. The markup is the ratio of profit to cost. We have already written above about how to calculate margin.
A clear example will help dispel any doubts that may arise.
Let’s say a company bought a product for 100 rubles and sold it for 150.
Let's calculate the trade margin: (150-100)/100=0.5. The calculation showed that the markup is 50% of the cost of the goods. In the case of margin, the calculations will look like this: (150-100)/150=0.33. The calculation showed a margin of 33.3%.
Correct analysis of indicators
For a professional analyst, it is very important not only to be able to calculate an indicator, but also to give a competent interpretation of it. This is a difficult job that requires
great experience.
Why is this so important?
Financial indicators are quite conditional.
They are influenced by valuation methods, accounting principles, conditions in which the enterprise operates, changes in the purchasing power of the currency, etc.
Therefore, the obtained calculation result cannot be immediately interpreted as “bad” or “good”. Additional analysis should always be performed.
Margin on stock markets
Exchange margin is a very specific indicator.
In the professional slang of brokers and traders, it does not mean profit at all, as was the case in all the cases described above.
Margin in stock markets becomes a kind of collateral when making transactions, and the service of such trading is called “margin trading”.
The principle of margin trading is as follows: when concluding a transaction, the investor does not pay the entire contract amount in full, he uses borrowed funds from his broker, and only a small deposit is debited from his own account. If the outcome of the operation carried out by the investor is negative, the loss is covered from the security deposit. And in the opposite situation, the profit is credited to the same deposit.
Margin transactions make it possible not only to make purchases at the expense of borrowed money broker. The client may also sell borrowed securities. In this case, the debt will have to be repaid with the same securities, but their purchase is made a little later.
Each broker gives its investors the right to make margin transactions independently. At any time, he may refuse to provide such a service.
Benefits of Margin Trading
By participating in margin transactions, investors receive a number of benefits:
- The ability to trade on financial markets without having large enough amounts in your account. This makes margin trading highly profitable business. However, when participating in operations, one should not forget that the level of risk is also not small.
- Opportunity to get additional income when decreasing market value shares (in cases where the client borrows securities from a broker).
- To trade different currencies, it is not necessary to have funds in these particular currencies on your deposit.
Management of risks
To minimize the risk when concluding margin transactions, the broker assigns each of its investors a collateral amount and a margin level.
In each specific case, the calculation is made individually.
For example, if after a transaction there is a negative balance in the investor’s account, the margin level is determined by the following formula:
UrM=(DK+SA-ZI)/(DK+SA), where:
DK – cash investor deposited;
CA - the value of shares and other investor securities accepted by the broker as collateral;
ZI is the debt of the investor to the broker for the loan.
It is possible to carry out an investigation only if the margin level is at least 50%, and unless otherwise provided in the agreement with the client. According to general rules, the broker cannot enter into transactions that would result in the margin level falling below the established limit.
In addition to this requirement, for carrying out margin transactions on the stock markets, a number of conditions are put forward, designed to streamline and secure the relationship between the broker and the investor. The maximum amount of loss, debt repayment terms, conditions for changing the contract and much more are discussed.
It is quite difficult to understand all the diversity of the term “margin” in a short time. Unfortunately, it is impossible to talk about all areas of its application in one article. The above discussions indicate only the key points of its use.
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: concept 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 maximum margin or profit.
What's the difference between margin and profit?
In any business there are concepts of margin and profit. Some equate them to each other, others argue that they cannot be compared. Both indicators have strategic importance for the economic success of an enterprise or bank.
Thanks to them, the financial result of the work, the efficiency of using available resources and the overall result are assessed. The definitions of profit and margin can often be encountered when discussing issues of Forex, in banking and other activities related to finance and economics. To understand which indicator shows what, let’s analyze each of them.
What is margin?
This term came from Europe Translated from English Margin or French Margin margin means extra charge. Margin is found in banking and insurance business, commercial transactions and transactions with securities, etc. Economists call margin the difference between a company's income and the cost of production. Often the words “margin” are replaced with “gross profit”. The principle of calculating the margin is simple: the cost is subtracted from the amount received. The resulting value indicates how much real money the organization receives from the sale of products without taking into account additional costs.
The importance of margin should not be underestimated. It shows how effective a particular business is. Margin is directly related to the company's income and evaluates its activities.
Bank employees talk about margin when they compare the difference in interest rates on loans and deposits. Relatively speaking, if a bank wants to attract customers with high rates on deposits, then it is forced to offer high rates on loans.
Margin plays a big role in assessing the performance of a company. Net profit will directly depend on its size. Margin is the basis for the formation of development funds. The margin percentage (or markup percentage) will be calculated by the ratio of cost to revenue. If you calculate the gross “dirty” profit to revenue, you get important indicator– margin coefficient. The percentage will give you the return on sales, and this is the main indicator of the performance of any organization.
If we take the concept of margin on an exchange, for example, Forex, then it means temporary collateral cooperation. During it, the participant receives the necessary amount to carry out the operation. The principle of margin transactions is that the participant does not have to pay the entire value of the contract. He uses the resources provided to him and a small part own money. As soon as the transaction is closed, the income received will go to the deposit on which they were placed. If the deal becomes unprofitable, the loss will be covered by borrowed funds, which will still have to be repaid later.
Nowadays, the “front-margin” and “back-margin” indicators, which are related to each other, have become fashionable. The first indicator reflects the receipt of income from markups, and the second - from shares and bonuses.
Thus, these indicators are calculated during the operation of any company. They formed a separate direction management accounting– marginal analysis. Thanks to margin, the company manipulates variable costs and expenses, thereby influencing the final financial result.
What is profit?
The final goal of any business is to make a profit. This is a positive financial result of the work. A negative one will be called a loss. You can see the difference between margin and profit in the income statement (form No. 2). To make a profit, you need to clear the margin from all expenses. The calculation formula will look like this:
Profit = Revenue - Cost - Selling costs - Management costs - Interest paid + Interest received - Non-operating expenses + Non-operating income - Other expenses + Other income.
The resulting amount is subject to taxation, after which net profit is formed. Then it goes to pay dividends, is put aside in reserve and invested in the development of the company.
If, when calculating the margin, only production costs (costs) are taken into account, then all types of income and expenses are involved in calculating profit.
In the business process, several types of profit are calculated, but what is important for management is net profit, which shows the difference between revenue and all costs. If the revenue is more nominal value and expressed in monetary terms, then all other costs include production costs, tax deductions, excise taxes, etc.
Gross profit reflects the difference between the amount received and production costs excluding taxes and other deductions. In its calculation, it is similar to marginal profit. Unlike gross “dirty” income, marginal takes into account variable expenses, for example, for fuel, electricity, wages, cost of materials for production, etc. Those companies that calculate marginal profit look not only at its amount, but also at the speed of circulation of money.
What is the difference between profit and margin?
Unlike profit, margin only takes into account production costs, from which only the cost of production is added up. Profit takes into account all the costs that arise in the course of doing business. Analysis of the results shows that as the margin increases, the company's profit also increases. The higher the margin, the higher the profit will be. In terms of size, profit is always less than margin.
If profit shows the net result of a business, then margin refers to the fundamental pricing factors on which the profitability of marketing costs, customer flow analysis, and income forecast depends. There is an important rule in management accounting that all changes that occur in revenue are proportional to the gross margin. Margin, in turn, is proportional to the increase or decrease in profits. Economists call the ratio of gross margin to profit the effect operating leverage. It is used to evaluate the effectiveness of available resources and the overall result.
Thus, all indicators of the financial world are eigenvalue. Their calculation will be influenced by the methods of analysis and accounting rules used. Correct interpretation of the dynamics of all indicators is necessary for competent planning of business activities. Both margin and profit say a lot about the performance of an organization.
It is recommended that calculations of these indicators be carried out regularly at specified periods in order to compare values and identify patterns. Seeing this or that dynamics, the manager can trace market trends and make the necessary rearrangements and adjustments in the organization’s activities, pricing policy and other aspects affecting the success of the company. The outcome of all work depends on how timely and correctly the margin and profit indicators are calculated and assessed.
In the vast majority of cases, a person who decides to become an entrepreneur does not have sufficient knowledge in the field of doing business. First you need to try to understand the essence of the main financial and economic terms. Most novice businessmen have no idea what margin is. This term has a fairly broad interpretation, that is, for each individual field of activity the meaning may be slightly different.
Margin made simple
The term “margin” means the difference obtained after deducting the cost of goods from the selling price, interest rates from quotations established on exchanges. This concept often found in the field of stock trading, as well as banking, trade and insurance. Each specific direction has characteristic nuances. The margin can be indicated in percentage or absolute values.
The term “margin” in trading is calculated using the following formula:
Margin=(Product cost-Cost price)/Product cost*100%
Each indicator necessary for the calculation taken into account in the formula can be presented in dollars, rubles and other absolute values.
In the course of analyzing the operation of an institution, the economist, who is an analyst, initially calculates the gross margin. This indicator represents the difference between the total revenue received from the sale of goods and the amount of additional costs. This type spending also includes costs of a variable nature, which are directly dependent on the presented volumes of manufactured goods. Net profit, which became the basis for the formation of fixed assets, is in direct proportion to the size of the gross margin.
It is also necessary to remember that the term “margin” in modern economic theory differs from the same concept, but in Europe. Abroad, the margin is considered a percentage rate that determines the ratio of the profit received by the company to the sales of manufactured products at the selling price. This value is used to establish an assessment of the level of performance of a specific organization in the trade and economic spheres. On the territory of the Russian Federation, margin represents the net profit received from a transaction, namely profit minus costs, including cost.
Bank margin
In the activities of bankers, a frequently encountered concept is the credit margin, which is considered the difference obtained after deducting the contract amount of the product from the amount received by the borrower in actual hands. The loan agreement specifies each amount agreed upon in the transaction.
Bank profit directly depends on the volume of bank margin. To analyze the profitability of banking activities, an indicator such as “net interest margin” is suitable, calculated as the difference calculated between capital and net interest income credit organization. The bank earns net interest income through lending and investing.
The term "guarantee margin" is considered when a bank provides a loan against collateral. This ratio is calculated by subtracting the loan amount from the price of the property pledged as collateral.
Margin and exchange activity
For example, a futures contract was purchased, the cost of which was 150 thousand marks on the RTS index, after some time the price increased and amounted to 150.1 thousand. The variation margin in the situation under consideration will be equal to one hundred points or approximately sixty-seven rubles. Provided that no profit is taken and the position is kept open, after the end of the trading session the variation margin indicator will develop into the income accumulated over the time passed. Margin calculation starts anew every day.
To put it simply, margin will be equal to the profit or loss received from one position that was opened during one trading session. When a position remains open for several sessions, the total will be the sum of the margin figures for each individual day.
Differences from markup
The best known term is “trading margin”, which is found in many areas of activity. The distinctive, more complex concept of “exchange margin” can only be found on the exchange. However, many beginners are confused about the trading margin ratio, regardless of how often it is used. The main mistake is to equate the trading margin and trading margin.
It is quite easy to identify the differences between the two indicators. The term “margin” is defined as the ratio of the proceeds to the price established on the market. The markup is equal to the ratio of the profit received from the sale of products to the calculated cost.
Margin and profit
As mentioned above, the term “margin” is interpreted differently in the European Union countries and in Russia. On the territory of the Russian Federation, margin is a concept similar to the term "net profit", therefore there is no fundamental difference in calculating profit and margin. It is important to remember that we are talking about profit, but not about markup.
However, there are still differences between one indicator and another. The term “margin” is the most important analytical indicator used on stock exchanges and in banking. The amount of margin provided by the broker is of significant importance to the trader. When analyzing the income received, the margin can be compared with the retail trade markup.
Read more: What is cost
