What Does Operating Margin Mean for the Future of Your Business?
For businesses, operating margin is really the end-all-be-all. Operating margin is the percentage of a businesses revenue that is profit, expressed as a percentage that reflects the amount of profit earned on each dollar a business takes in.
For potential investors, the operating margin represents not just profit, but a chunk of change that could be used to pay investors back for loans.
Figuring Operating Margin
Operating margin is figured by subtracting the cost of doing business (expenses, labor costs, materials costs, etc.) from the company’s total revenue. The difference (or profit) is then divided by the total revenue, leaving a percentage that represents the pennies earned as profit on each dollar made.
Operating Margin Serves as a Measuring Stick
Profit is obviously a positive thing for businesses. A profitable business is successful and has the potential for room to grow. Beyond that, a lot can be learned from a business’ operating margin. It’s a measure of efficiency, managerial competency, and whether the company is spending smartly. It can also be used more specifically to determine what’s working and what’s not, allowing businesses to make better choices about which projects they ramp up and which they eliminate entirely.
It also serves as a measuring tool for banks that provide financing for businesses. Companies with steady, high profit margins when compared to others in their industry are typically a safe bet, meaning banks are more willing to lend them money. Companies where the margins fluctuate a lot may have a tough time securing financing since this can be a sign of using resources inefficiently or a particularly volatile industry or target market.
It Represents More than Profit
While operating margin, at its most basic, represents the profit a company brings in, it’s so much more than that. It helps investors and executives within the company get a good look at how effective the company is, especially when compared to operating margins of companies in the same industry. A company with a very low operating margin would have a difficult time growing, and a company with a high operating margin has more opportunities for growth.