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Hello site readers! One of the problems of human society is the lack of mutual understanding between people.
Often people cannot understand each other not for some ideological reasons, but because of different understandings of terminology.
The word “margin” is found quite often in the press and everyday life. It is paradoxical that such a simple and familiar term hides a long list of completely different phenomena and concepts.
What does the word Margin mean?
The French word Marge literally means "difference". For example, the difference between the cost of producing a product and its price on the market for the final buyer.
In various fields of activity there is a need for accounting and control in terms of the difference between certain phenomena.
- In everyday life, “margin” is often used as a synonym for the words “profit” or “gesheft”. This implies some kind of quick profit from a profitable deal.
In the field of serious, professional commerce, we are also talking about benefits as the difference between costs and income, but in relation to phenomena or actions that reflect complex internal business processes.
Margin and Marginality - what is their difference?
Margin, marginality and even marginality - isn’t it true, these terms are easy to confuse.
As a basic concept, margin refers to the difference between production costs and the amount of money that the buyer paid for the product.
The margin is calculated by the average ratio of the cost of production of a product to the selling price and is expressed as a percentage.
Margin reflects the global profitability of a business - the total cost of all the company's production costs to the total cost at which all these goods are sold on the market.
Marginality is used when calculating the profitability of a business, for example, when drawing up a business plan. Is it worth investing money in this project? Will the investment pay off and to what extent?
- The more marginal a business is, the more profitable and promising it is.
In simple words, margin is a parameter that shows whether it is worth investing in the production of a particular product.
A marginality business shows whether it is worth getting involved in this enterprise, whether the undertaking will lead to bankruptcy.
Marginality generally refers to sociology and this term is usually used to designate groups of people who find themselves incapable of normal adaptation in society.
Types of Margin in various areas
As you already understand, margin in different contexts, in different types of activities, determines quite different phenomena. Let's dig a little deeper into the details of margins in different areas.
You can understand how concepts differ in different areas by considering the question from the point of view of financial instruments - what is used to make a profit?
In the bank
In banking, margin is an indicator of the difference between the cost of securities or exchange rates, credit interest.
Banks make money by issuing loans, where profit is the difference between the total costs of lending to the average borrower and the commissions received from him.
The bank deals with currency exchange. The margin is the profit that the bank will receive as a result of operations first on the purchase and then on the sale of currency.
In trade
Since trade is not involved in the actual production of goods, margin here refers to the difference between the cost of acquisition and the price at which the product is sold.
In the commercial sphere, a similar concept is used in everyday life - trade margin.
The trade margin does not relate to the calculation of profits and assessment of the profitability of a business, but rather is compensation for costs and overhead expenses during the period from the delivery of goods to the seller to their purchase on the market.
The markup also refers to the difference between wholesale and retail prices. The retailer himself can set the markup, raising the price tags a little higher or lower, depending on the success of the trade.
In economics
In a real economy, margin is just a basic concept; it means the percentage of the difference between investments in production and profits from the sale of a particular product.
Forex
In the investment market, brokers and traders on exchanges understand margin as a certain security deposit assigned to promising transactions.
The stock speculator contributes a margin as a guarantee of the transaction, which gives the right to receive a loan, with the help of which it is supposed to carry out speculative operations.
The bottom line is that the Forex market is open and many traders do not have sufficient capital for serious transactions. Then the trader takes a larger amount of credit from his broker against collateral, which is called margin.
In this context, margin means the guarantee or compensation of an accredited broker when issuing a loan to an ordinary trader for a venture (risky) operation.
Speculation on borrowed funds borrowed by a trader from a broker is called “margin trading” in Forex.
An indicator of the efficiency of a credit institution and the profitability of its operations, formed by the difference between the funds raised and the profit on their investments.
The simplest example of a margin is the difference between a relatively low interest rate on deposits and a higher interest rate on loans issued.
Effective products in terms of margin in the banking sector are considered to be consumer loans and credit cards. At the same time, issuing loans to company employees and representatives of partner banks have priority, since the risks for this category of borrowers are significantly lower and it is possible to fully check the borrower before providing him with money; Therefore, despite the relatively low margin of this procedure, it is beneficial for banks.
Margin can be characterized both in numerical terms (in rubles) and in percentage terms.
Types and indicators of bank margin
Depending on the product offered by the credit institution, the margin may be:- credit - the amount is the sum of the difference received from the amount issued under the loan and the amount received as a result of loan repayment;
- guarantee - the amount consists of the difference between the value of the property pledged and the loan amount;
- percentage - the value is made up of the ratio of the difference between income and expenses as a percentage of the bank's assets (the indicator will depend on whether the bank's total assets are taken into account or only working ones).
- conditions for opening deposits;
- term and amount of interest on loans;
- inflation rate;
- structure of incoming resources;
- percentage of active operations that generate net income;
- economic situation in the country and in the world, etc.
Features of marginality in the field of banking services
The bank itself does not produce any new products. It makes a profit by wisely investing financial assets and providing loans to consumers. The main expenses of a credit organization are related to the payment of interest on deposits and ensuring the activities of the organization.Therefore, the margin will be calculated not based on a unit of goods, but for a specific period, for example, a quarter, a year, etc.
The main task of the banking margin is to determine the effectiveness of the institution’s investment of its own funds. This is if we take the theory. But in practice, banks strive to increase the number of commission transactions, that is, those that do not require investment of their own funds, but will bring profit to the organization. We are talking, for example, about trading coins.
The second option is to add “hidden” commissions and risk insurance when issuing loans to clients. At the same time, as the loan amount increases, the size of commission transactions will increase.
This is the so-called transactional policy, which, according to research by ACRA analysts, will allow many banks to stay afloat, while those banks that relied on expensive liabilities from organizations and invested little will receive lower margins.
Thus, margin is an analytical tool that allows you to determine the efficiency of a credit institution. Its meaning can be changed either by elaborating the terms of the “old” product, introducing a transactional policy, or developing new proposals. In this case, you should proceed from clearly defined priorities: low risks and small profits or increasing the margin, attracting new, untested clients.
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.
Main types
This term is used in many areas of human activity - there are 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 can be the purchase of raw materials for production, payment of wages to employees, spending money on the sale of goods, etc. It characterizes the overall operation of the enterprise, determines its net profit, and is also used to calculate other values.
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, firms operating in the retail trade usually have fairly small numbers, while large manufacturing enterprises have fairly 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 on trading platforms. It is also the number by which the amount of money taken as collateral during a trade transaction can increase or decrease.
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 product, various costs, business management costs, interest paid or received, and other types of expenses are also taken into account.
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:Basic concepts:
G.P.(grossprofit) - gross margin. Reflects the difference between revenue and total costs.
C.M.(contribution margin) - marginal income (marginal profit). The difference between revenue from product sales and variable costs
TR(totalrevenue) – revenue. Income, the product of unit price and production and sales volume.
TC(totalcost) - total costs. Cost price, consisting of all costing items: materials, electricity, wages, depreciation, etc. They are divided into two types of costs – fixed and variable.
F.C.(fixed cost) - fixed costs. Costs that do not change when capacity (production volume) changes, for example, depreciation, director’s salary, etc.
V.C.(variablecost) - variable costs. Costs that increase/decrease due to changes in production volumes, for example, the earnings of key workers, raw materials, materials, etc.
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:Using only the gross margin (marginal income) indicator, it is impossible to assess the overall financial condition of the enterprise. These indicators are usually used to calculate a number of other important indicators: contribution margin ratio and gross margin ratio.
K VM = GP/TR
Likewise Marginal Income Ratio equal to the ratio of marginal income to the amount of sales revenue:
K MD = CM / TR
It is also called the contribution margin rate. For industrial enterprises the margin rate is 20%, for retail enterprises – 30%.
Interest margin shows the ratio of total costs to revenue (income).The gross margin ratio shows how much profit we will make, for example, from one dollar of revenue. If the gross margin ratio is 22%, this means that every dollar will bring us 22 cents in profit.
This value is important when it is necessary to make important decisions about enterprise management. It can be used to predict changes in profits during expected growth or decline in sales.
GP = TC/TR
or variable costs to revenue:
CM=VC/TR
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 net profit, which is used for the further development of the enterprise 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.
The economic term “margin” is used not only in trade and stock exchange operations, but also in insurance and banking. This term describes the difference between the trade value of a product, which is paid by the buyer, and its cost, which consists of production costs. For each field of activity, the term will have its own specific use: in stock exchange activities, this concept describes the difference in securities rates, interest rates, quotes or other indicators. This is a rather unique, non-standard indicator for stock exchange transactions. In terms of brokerage operations on stock markets, margin acts as collateral, and trading is called “margin”.
In the activities of commercial banks, margin describes the difference between interest on issued loan products and existing deposits. One of the popular concepts in banking is “credit margin”. This term helps describe the difference obtained if the agreed amount is subtracted from the final loan amount issued to bank clients. Another indicator that directly describes the efficiency of banking activities can be considered “net margin” expressed as percentages. The calculation is made by finding the difference between capital and net income, measured as a percentage. For any bank, net income is generated through the sale of credit and investment products. When issuing a loan amount secured by property, to determine the profitability of the transaction, the “guarantee margin” is calculated: the amount of the loan amount is subtracted from the value of the collateral property.
This term simplifies the concept of profit. The indicator can be expressed in:
- percent (calculated as the ratio between the difference between the cost and the cost of the product to the cost);
- in absolute terms – rubles (calculated as a trade margin);
- ratio of shares (for example, 1:4, used less frequently than the first two).
Thanks to this indicator, the costs of delivery, product rejection, and sales organization, which are not reflected in the cost of the product, are reimbursed. It also contributes to the formation of the company's profit.
If the margin does not increase with an increase in trading value, this means that the cost of goods is increasing faster, and the company risks soon becoming unprofitable. To prevent this from happening, the pricing of the product must be adjusted.
This indicator is relevant for calculations for both large and small organizations. Let's summarize why it is needed:
- analysis of the organization's profitability;
- analysis of the financial condition of the organization, its dynamics;
- when making a responsible decision, in order to justify it;
- forecasting the profitability of possible clients of the organization;
- formation of pricing policies for certain groups of goods.
It is used in the analysis of financial activities along with net and gross profit for both individual goods or their groups, and the entire organization as a whole.
Gross margin is revenue from sales of products for a certain period from which variable costs allocated for the production of these products are subtracted. This is an analytical indicator, which, when calculated, may include income from other activities of the enterprise: the provision of non-production services, income from the commercial use of housing and communal services and other activities. The net profit indicator and the fund allocated for production development depend on the gross margin. That is, in an economic analysis of the activities of the entire enterprise, it will reflect its profitability through the share of profit in the total volume of proceeds.
How to calculate margin
The margin is calculated based on the ratio in which the final result will be expressed: absolute or percentage.
The calculation can be made if the trade margin and the final cost of the goods are accurately indicated. These data make it possible to determine mathematically the margin, expressed as a percentage, since these two indicators are interrelated. First, the cost is determined:
Total cost of goods – Trade margin = Cost of goods.
Then we calculate the margin itself:
(Total cost – Product cost)/Total cost X 100% = Margin.
Due to different approaches to understanding margin (as a profit ratio or as net profit), there are different methods for calculating this indicator. But both methods help in the assessment:
— the possible profitability of the launched project and its prospects for development and existence;
— the value of the product life cycle;
— determining the effective volumes of production of goods and products.
Margin formula
If we need to express the indicator through percentages, in trading operations the formula is used to determine the margin:
Margin = (Product Cost – Product Cost) / Product Cost X 100%.
If we express the indicator in absolute values (foreign or national currency), we use the formula:
Margin = Product Cost – Product Cost.
What is marginality
Most often, marginality describes the increase in capital in monetary terms per unit of production. In general terms, this is the difference between production costs and the profit received as a result of product sales.
Marginality in commerce is the marginal profit of a product, subject to the minimum cost and the maximum possible markup. In this case, they talk about the high profitability of the enterprise. If a product is sold at a high price, the investment in production is large, but with all this, the profit barely compensates for the costs - we are talking about low margin, since in this case the profitability ratio (margin) will be quite low. Using the concept of “profitability ratio,” we take 100% of the cost of the product paid by the consumer. The profitability of the enterprise is higher, the higher this ratio is.
The profitability of a business or enterprise is its ability to obtain net income from invested capital for a certain period, measured as percentage.
The procedure for determining margin is carried out not only at the initial stage of launching a product (or a company as a whole), but also throughout the entire production period. Constant calculation of margin allows you to adequately assess the possible influx of income and the more sustainable the business development will be.
It should be noted that in Russia and Europe there are different approaches to understanding marginality. For Russia, a more typical approach is where this concept is considered to be net gross income. Another analogue of this concept is the amount of coverage. In this case, the emphasis is on this amount as part of the revenue that forms the profit of the enterprise and is responsible for covering costs. The main principle here is to increase the organization’s profit in proportion to the reimbursement of production costs.
The European approach tends to reflect the gross margin as a percentage of the total income received after the sale of the product, from which the costs associated with the production of the product have already been deducted.
The main difference between the approaches is that the Russian one operates with net profit in monetary units, the European one relies on percentage indicators and is more objective in assessing the financial well-being of the organization.
When calculating marginality, economists pursue the following goals:
- assessment of the prospects of a specific product on the market;
- what is its “lifespan” on the market;
- the relationship between the prospects or risks of introducing a product to the market and the success of the launched enterprise.
It is important to calculate the marginality of a product for those companies that produce several types or groups of goods. At the same time, we obtain marginality indicators that can clearly show which of the goods have a better chance of future production, and the production of which can, or even should, be abandoned.
Margin and markup - their difference
If we express the margin as a percentage, then in this case it is impossible to say that it can be equated to a markup. When calculating in this case, the markup will always be greater than the margin. Also in this case it can be more than 100% (unlike the expression in absolute values, where it cannot be more than 100%). Example:
Markup = (price of goods (2000 rubles) - cost of goods (1500 rubles)) / cost of goods (1500 rubles) X 100 = 33.3%
Margin = price of the product (2000 rub.) – cost of the product (1500 rub.) = 500 rub.
Margin = (product price (2000 rubles) – cost of goods (1500 rubles))/product price (2000 rubles) X 100 = 25%
If we consider in absolute terms, then 500 rubles. – this is margin = markup, but when calculated as a percentage, margin (25%) ≠ markup (33.3%).
The markup as a result means the ratio of profit to the cost, and the margin is the ratio of profit to the trading value of the product.
Another nuance through which you can identify the difference between the concepts of “markup” and “margin”: the markup can be considered as the difference between the wholesale and retail cost of a product, and the margin as the difference between cost and cost.
In professional economic analysis, it is important not only to calculate the indicator mathematically correctly, but also to take the initial data necessary for specific circumstances and correctly use the results obtained. Using certain calculation methods, you can obtain data that differs from each other. But taking into account the conventionality of the considered indicators, in order to fully and effectively describe the economic state of the organization, additional analysis is performed on other indicators.
In the economic sphere, there are many concepts that people rarely encounter in everyday life. Sometimes we come across them while listening to economic news or reading a newspaper, but we only imagine the general meaning. If you have just started your entrepreneurial activity, you will have to familiarize yourself with them in more detail in order to correctly draw up a business plan and easily understand what your partners are talking about. One such term is the word margin.
In trade "Margin" expressed as the ratio of sales proceeds to the cost of the product sold. This is a percentage indicator, it shows your profit when selling. Net profit is calculated based on margin indicators. It’s very easy to find out the margin indicator
Margin=Profit/Sales Price * 100%
For example, you bought a product for 80 rubles, and the selling price was 100. The profit is 20 rubles. Let's do the calculation
20/100*100%=20%.
The margin was 20%. If you have to work with European colleagues, it is worth considering that in the West the margin is calculated differently than in our country. The formula is the same, but net income is used instead of sales proceeds.
This word is widespread not only in trade, but also on stock exchanges and among bankers. In these industries, it means the difference in securities prices and the bank’s net profit, the difference in interest rates on deposits and loans. For different areas of the economy, there are different types of margin.
Margin at the enterprise
The term gross margin is used in businesses. It means the difference between profit and variable costs. It is used to calculate net income. Variable costs include equipment maintenance costs, labor costs, and utilities. If we are talking about production, then gross margin is the product of labor. It also includes non-operating services that are profitable from outside. This is an identifier of a company's profitability. From it various monetary bases are formed to expand and improve production.
Margin in banking
Credit margin– the difference between the commodity value and the amount allocated by the bank for its purchase. For example, you take out a table worth 1000 rubles on credit for a year. After a year, you pay back 1,500 rubles in total with interest. Based on the formula above, the margin on your loan for the bank will be 33%. Credit margin indicators for the bank as a whole affect the interest rate on loans.
Banking– the difference between the interest rate coefficients on deposits and issued loans. The higher the interest rate on loans and the lower the interest rate on deposits, the greater the bank margin.
Net interest– the difference between interest income and expense in a bank in relation to its assets. In other words, we subtract the bank's expenses (paid loans) from income (profit on deposits) and divide by the amount of deposits. This indicator is the main one when calculating the bank’s profitability. It defines stability and is freely available to interested investors.
Warranty– the difference between the probable value of the collateral and the loan issued against it. Determines the level of profitability in case of non-return of money.
Margin on the exchange
Among traders participating in exchange trading, the concept of variation margin is widespread. This is the difference between the prices of the purchased futures in the morning and in the evening. A trader buys futures for a certain amount in the morning at the beginning of trading, and in the evening, when trading closes, the morning price is compared with the evening price. If the price has increased, the margin is positive; if it has decreased, the margin is negative. It is taken into account daily. If analysis is needed over several days, the indicators are added up and the average value is found.
The difference between margin and net income
Indicators such as margin and net income are often confused. To feel the difference, you should first understand that margin is the difference between the values of purchased and sold goods, and net income is the amount from sales minus consumables: rent, equipment maintenance, utility bills, wages, etc. If we subtract the tax from the resulting amount, we get the concept of net profit.
Margin trading is a method of buying and selling futures using borrowed funds against certain collateral - margin.
The difference between margin and “cheat”
The difference between these concepts is that the margin is the difference between the sales profit and the cost of the goods sold, and the markup is the profit and the cost of the purchase.
In conclusion, I would like to say that the concept of margin is very common in the economic sphere, but depending on the specific case, it affects different indicators of the profitability of an enterprise, bank or stock exchange.
