Margin and markup in simple terms. Margin - what is it

Hello dear readers of the blog site. For those who, in one way or another, are faced with the topic of doing business or any other financial aspects activity, you must have heard such a word as margin.

At the same time, this word is often used in everyday life, but not everyone fully understands its meaning (which is common, but very few people understand what it really means).

So what is margin? What is margin or margin? Speaking in in general termsthen this is a share of the profit, which is calculated as the difference between the cost of something and the price at which it is sold.

Remember the anecdote about 3%, where not a very distant businessman explains that he lives on only 3%, buying something for 100 rubles and selling it for 300. But such discrepancies are actually found not only in questionnaires. People, for example, often confuse margin and markup, and then they have to find out for a long time which of the partners was wrong.

In simple words about margin

There are several very similar words that mean almost the same thing - these are words profit, margin and, of course, the margin. Today we will focus on margins, but we will definitely mention how they differ from each other, so that later we can speak with business partners in the same language without any "confusion".

Historically, the word "margin" comes from the English "margin", which, as usual in the great and mighty Russian language, has dozens of meanings. For example, in a series of articles about site layout, and there this word meant margins, indentation from adjacent elements, a certain amount of free space.

Actually, it means something similar in the world of finance. In fact, this is precisely the very notorious profit that a businessman winds up relative to the base cost anything (goods, services). In the most general sense, it is the difference in the price of a product at different stages of its movement in the market (from creation to acquisition).

The margin can be expressed both in absolute monetary units (rubles, tugrigs, dollars, hryvnias, euros) and as a percentage. It is important to remember - margin can never be more than 100%... This is an axiom, and by remembering this simple rule, you will be able to avoid mistakes and discrepancies with colleagues and partners in the future.

They confuse the margin with the so-called trade margin, which, again, can be expressed in both absolute and relative units. Moreover, in absolute terms, both the margin and the margin will turn out to be the same, but in relative terms, they will be different. All the confusion arises precisely when marginality is calculated as a percentage. Why is this happening? Let's show you with an example.

Let us have a product that we bought for 100 rubles, and sell for 300 rubles (those same notorious three percent from the anecdote). In this case in absolute units both the margin and the mark-up will be calculated for the same formula: resale price minus purchase price. In our example, this will be 300 minus 100 \u003d 200 rubles. Everything is clear here and no one ever gets confused.

But the relative values \u200b\u200bof marginality and trade margin are calculated in different ways. Percentage margin Is 300 - 100 and divided by 300 (and, of course, multiplied by 100%). And the trade margin in percentage is 300 - 100 divided by 100 (multiplied by 100%).

You can see for yourself that the margin in our example will be 66% (much less than 100%, although the intermediary has tripled the price of the goods), but the trade margin will be exactly the same 300%. Clear? We felt the difference. Therefore, it is important to very clearly understand what in question - about marginality or about a trade margin, because as a percentage it turns out to be completely different numbers (often differing at times).

If my example seemed incomprehensible to you, then in this two-minute video take a look at the formulas with your own eyes and get imbued with the essence:

Well and margin differs from net profit the fact that additional costs are not taken into account here, for example, for the temporary storage of goods, for its transportation, for advertising, etc. That is, the net profit will be slightly less than the calculated margin. But this, of course, will not be as striking a difference (however) as with a trade margin.

Marginality and margin trading - what is it?

I'll torment you a little more. You can also hear the word "margin" in relation to various stock market speculations. The exchange is, in fact, only a platform for transactions and there they earn in the same way as in life - to buy at a lower price and sell at a higher price. It is speculation and speculation in Africa (and in fact earlier this word was abusive).

So, in some other types of exchanges (for example, in, about which I recently wrote) there is an opportunity conduct margin trading with the so-called shoulder. What it is? In principle, I just wrote about this in great detail in the article given on the link, but here I will briefly repeat myself.

On such exchanges, you place bets on the fall or rise in the rate (dollar, pound, euro, bitcoin or other altcoins). If you guessed the direction of movement of the course, then your earnings will depend on how much the course changes in the direction you need.
The main thing here is to close in time, until the process of movement of the course in the other direction begins. Your profit will be equal to the margin on the trade (the difference between the initial price and the closing price of the trade). You can make money both on the rise and on the fall - this is not the point.

Margin trading with leverage allows having a relatively small amount on the deposit (exchange account) earn (or lose) a lot at once... Without leverage trading, for example, with $ 10 on your account, you can earn a couple of cents, and if you used x100 leverage in the same situation, you would have earned a hundred times more, i.e. a couple of dollars.

True, the loss in margin trading with leverage will be as many times greater, therefore, beginners are highly discouraged from starting trading immediately with large leverage, because there is a risk of losing everything quickly. It is noteworthy that in this case you risk only with the money on the deposit. You will not be able to lose more than this and will not be left to anyone (this is not a loan).

You are kind of given virtual money (in our example, increasing the real $ 10 to $ 1000 thanks to the x100 leverage). In any case, even if you win, then at your own expense you get only profit from the deal (that very notorious margin) plus the amount that you actually used (the virtual increase will remain virtual). In our example, by betting $ 10, you will receive a total of $ 12 (increase your deposit).

If you lose, then the margin (negative, i.e. loss) will be deducted from the amount participating in the transaction. In our example, instead of $ 10 staked, you only have $ 8 ($ 10 bet minus $ 2 loss). But with a large leverage, you can lose everything, and everything in general, and very, very quickly (literally in seconds), if you choose the wrong direction of the rate movement (dollar and cryptocurrency), and the rate will sharply go in the other direction.

In general, this type of trading can allow earn much faster (tens and hundreds of times), but the risk of losing everything increases the same way. For beginners, as I already mentioned, margin trading with leverage above two and three is highly discouraged. Pros, on the other hand, can add marginality in time and stay afloat even with an unsuccessful bet, waiting for the desired direction of the course. IMHO.

Good luck to you! See you soon on the blog site pages

What is margin?

This term came from Europe. Translated from English Margin or French Marge, margin means extra charge. Margin is found in banking and insurance business, commercial transactions and operations with securities, etc. Economists call the difference between the company's income and the cost of production as a margin. Often the words “margin” are replaced by “gross profit”. The principle of calculating the margin is simple: the cost is deducted 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. The profit of the company is directly related to the margin and its activity is assessed.

Bankers 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 large role in assessing the performance of a company. The net profit will directly depend on its size. The margin is the basis for the formation of development funds. The margin percentage (or percentage markup) will be calculated as a cost to revenue ratio. If you calculate the gross “dirty” profit to revenue, you get an important indicator - the margin ratio. The percentage will be the return on sales, and this is the main indicator of the work 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 for 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 of his own money. As soon as the deal is closed, the received income will go to the deposit on which they were placed. If the deal becomes unprofitable, the loss will be covered by borrowed funds, which then still have to be returned.

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 the margin, and the second - from promotions and bonuses.

Thus, these indicators are calculated in the course of the work of any company. They formed a separate direction management accounting – margin analysis... Due to the margin, the company manipulates variable costs and costs, thereby affecting the final financial result.

What is profit?

The ultimate goal of any business is making 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 profit and loss 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 \u003d Revenue- Cost price- Selling costs- Administrative costs- Interest paid + Interest received- Non-operating expenses + Non-operating income- Other expenses + Other income.

The resulting value is subject to taxation, after which the net profit is formed. Then it goes to pay dividends, is deposited in the reserve and invested in the development of the company.

If only production costs (prime cost) are taken into account when calculating the margin, then all types of income and expenses are involved in the calculation of profit.

In the process of business, several types of profit are calculated, but for management, net profit is important, which shows the difference between revenue and all costs. If the revenue has more nominal value and is expressed in monetary terms, then all other costs include production costs, and tax deductions, excise taxes, etc.

Gross profit reflects the difference between the amount received and the cost of production, excluding taxes and other deductions. By its calculation, it is similar to the margin profit. Unlike the gross "dirty" income, the marginal one takes into account variable costs, for example, for fuel, electricity, wages, the cost of materials for production, etc. Those companies who calculate margin profit, look not only at its amount, but also at the speed of money circulation.

What is the difference between profit and margin?

Unlike profit, margin only takes into account production costs, of which only the cost of production is composed. Profit takes into account all the costs that arise in the course of doing business. Analysis of the results shows that with the increase in the margin, the profit of the company also increases. The larger the margin, the higher the profit will be. In terms of size, the profit is always less than the margin.

If the profit shows the net result of the business, then the margin refers to the fundamental factors of pricing, on which the profitability of marketing costs, customer flow analysis, and income forecast depends. There is an important regularity in management accounting that all changes that occur with revenue are proportional to the gross margin. The margin, in turn, is proportional to the increase or decrease in profit. Economists called the ratio of gross margin to earnings the effect of operating leverage. It is used to assess the effectiveness of the use of available resources and the overall result.

Thus, all indicators of the financial world have their own meaning. 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 margins and profits say a lot about an organization's performance.
Calculations of these indicators are recommended to be carried out regularly at specified periods in order to compare values \u200b\u200band identify patterns. Seeing this or that dynamics, the leader can follow the market trends and carry out the necessary rearrangements and adjustments in the activities of the organization, pricing policy and other aspects affecting the company's success. The result of all work depends on how timely and correctly the margin and profit indicators will be calculated and evaluated.

What is better to focus on: margin or profit?

These are interdependent indicators. You cannot focus on only one of them. If the preliminary value of profit is calculated based on the margin, then the size of the margin is also adjusted based on the profit. Through margin, you can manage many components of business processes, for example, pricing, which ultimately affects profits. You cannot exclude any of these indicators from the financial chain. The outcome can be disastrous. Each company, although it claims that the final goal is to make a profit, but they could not have entered it without calculating the potential margin.

Together with market economy it became necessary to know not only the laws of building a business, but also terminology. Most of the words in this area are foreign, and it is not always possible to immediately understand their meaning. In addition, often foreign words and concepts have analogs or similar concepts in Russian, which causes additional confusion. The concept of margin, which is often equated with a markup or profit, is no exception, but this is wrong. To understand the difference, let's try to formulate the content of the term "margin" in simple words.

Definition

The main definition of margin is formulated as the difference between the cost of goods and the amount received from the sale of these goods. The English word "margin" and the French word "marge" are translated as "difference". This term is used in various sectors of the economy related to trade, insurance, stock trading and banking. Everywhere the term has its own characteristics, but always defines the difference between different valuesdetermining costs and revenues.

The value of the margin can be expressed in any currency, but more often the margin value is used as a percentage. And it is in percentage terms that the margin acquires its differences from the well-known concepts of profit and margin, which are also calculated as the difference between costs and received revenue. The difference between these concepts lies in the list of costs included in expenses, as well as in relation to which the percentage of the margin is calculated.

Margin and markup - what's the difference

The margin and markup, defined in monetary units, will always be equal to each other already based on the definition of each concept. The margin is understood as the amount by which the product increases, in other words, how much the selling price is higher than the production cost.

Margin \u003d Selling Price - Cost

For margin in absolute terms, the formula is the same.

Everything changes when the value of these concepts is determined as a percentage:

Margin \u003d [(Selling Price - Cost) / Cost] x 100%

Margin \u003d [(Selling price - Cost price) / Selling price] x 100%

Cost of one product: 50 rubles

Sale price: 90 rubles

In rubles:

Extra charge \u003d Margin \u003d 90 - 50 \u003d 40 rubles

In percentages:

Margin \u003d [(90 - 50) / 50] x 100% \u003d 80%

Margin \u003d [(90 - 50) / 90] x 100% \u003d 44.4%

The difference in numbers is obvious, but the main difference is that if the margin can exceed 100%, then the margin will always be below this value. The margin thus determines how much of the mark-up as a percentage of the selling price is, which is important for determining profitability. Indeed, for any type of commercial transaction, it is important that there is a profit that can cover the costs incurred and provide an opportunity for further development.

What characterizes the margin

Margin is a very important indicator of an enterprise's efficiency, since its value characterizes how profitable the enterprise is and how it is capable of developing. When analyzing the financial solvency of an enterprise, the concept of marginal profitability is used, which is calculated as the difference between the amount received as revenue for products sold and the amount of variable costs. The higher the indicator, the sooner you can cover fixed costs and get a net profit. This term is to some extent close to the concept of gross profit used in Russia.

Views

The concept of "margin" can have its own specificity and classification for different areas of the economy. Everywhere, it invariably reflects the difference between the revenue received and the costs, and in some cases, the margin can be both positive and negative. Let's consider where and in what forms the concept of margin is applied.

For production

The following types are distinguished:

Gross - is defined as the excess of the proceeds received after the sale of products over variable costs (purchase of raw materials, wage, transportation costs, etc.), referred to the amount of proceeds, as a percentage. It turns out that the gross margin shows the percentage of profit in revenue. The level of gross margin is used as a calculated analytical indicator of the viability of the enterprise and shows the ability of the enterprise to form funds necessary for development.
Clean. It is calculated as the ratio of net profit to revenue, which allows you to determine how much of the profit falls on a unit of revenue. This value is directly related to the profitability of the business, demonstrating how efficient the enterprise itself or the products it produces are profitable. The level of net margin makes it possible to calculate the marginality of an enterprise, which characterizes the ratio of profit to capital invested in business.

Banking

In the banking business, the margin is determined for each of the ways the bank receives income:

Credit - the difference between the amount of the loan to be issued specified in the agreement and the amount received by the client.
Guarantee - the amount of excess of the collateral value over the loan amount.
Banking - reflects how much the interest rate on loans exceeds the deposit rate.
Net interest () - basic indicator banking business, defined as the ratio of the difference between commission income and expenses to the amount of the bank's assets.

Exchange sphere

The term "margin" is closely related to stock trading. This is where the term margin trading comes in. This concept is found on stock and currency exchanges, as well as on modern cryptocurrency exchanges. The essence of exchange trading is in making a profit from price changes at the time of purchase of the subject of trade and the price at the time of sale. If the price went up, then a positive margin is obtained, if the price fell, respectively, negative. This type of margin is called variation margin.

The peculiarity of margin trading is that when investing a small amount in exchange trading, you can operate with much larger amounts (the so-called leverage). With this trading option, the purchase amount increases depending on the chosen leverage. For example, if the leverage is 1: 100, then with an invested $ 10, you can buy for $ 1000. Accordingly, the received margin increases 100 times, both positive and negative, which, when closing a position, is either added to the existing deposit, or subtracted from it. This way of trading on the stock exchange attracts with the possibility of quick and large earnings, but it is always worth remembering that losses will be just as large and quick.

Insurance

For insurance companies, the solvency margin is considered the main indicator. This indicator is calculated by determining the difference between the company's assets and the amount of liabilities to customers. It shows the ability of insurers to cover possible insurance liabilities not only with existing payments, but also own capitalfree of obligation. The state controls the level of solvency margin, for this it has normative value, and its actual value is determined. Under normal operation of an insurance organization, the actual value cannot be less than the normative one.

The topic of margin, its definition, calculation formulas, use in assessing the state, efficiency of enterprises is extensive and requires special training. We tried to briefly give an idea of \u200b\u200bthis concept, options for its use, features in various areas of the economy.

In contact with

Quite often, entrepreneurs start their businesses based on good margins. She evaluates the profitability of the business. In this article, we will talk in detail about the margin, as well as some of the features associated with it.

It doesn't matter how much income your business brings, it is important that you spend as little money as possible on its production. For example, if you receive $ 100 million a year, but spend $ 100 million and one dollar, then you will not be able to make money on such a business. In order for your business to exist for a long time, it must generate income. No firm will last long if it generates little income. The resulting profit keeps your business afloat.

Every entrepreneur starting his own business must estimate the expected profitability. For your business to be successful, this is a prerequisite. Therefore, before starting your business, you need to calculate the expected margin. This check will help you save your money and assess the possible risks. You can often observe such a situation when a business is started without miscalculating the risk. We recommend that you do this at the initial fuck of starting your business.

Determination of margin

Margin is an increase in cash equivalent, taking into account costs and the cost of goods. However, such a concept will not give you a complete definition of this monetary instrument. Margins increase if production costs decrease and product prices rise. So, you need to ensure that you maximize your profits by reducing costs. Let's analyze this definition in more detail.

First you need to supplement the above concept.
Usually, marginality is understood as the increase in money capital per unit of goods.

That is, marginality is the difference between all costs that were spent on production and the profit received.

The process of calculating the margin will be carried out both at the start of your business and throughout its entire existence.

The more often you determine the margin, the better your business will be, because you will correctly estimate the expected cash growth.

Calculation formula

To understand the essence of this procedure, you need to specify the formula for calculating the marginality:

MAR \u003d DOH-ISD

This formula provides us with a visual understanding of the margin calculation process. There is nothing difficult in calculating the margin. Two indicators will be enough for you to determine the profitability of your business.

Let's consider a specific example.

Let's say you need to produce 2,000 units of a product, the market price of which is 20 rubles a piece. Total production costs 25 thousand rubles.

Substituting data into the above formula:

MAP \u003d 2000 * 20-25000 \u003d 15,000 rubles.

Thus, we have established that the margin of our company will be 15 thousand rubles.

You also need to indicate that the margin can be calculated not in monetary terms, but as a percentage.

Let's look at another example.

Let's say a broker offers you to buy 500 shares at $ 1 each. In addition, he said that their cost next month will be $ 3.

It turns out that you had $ 500, with an investment in the stock market, your amount became equal to $ 1,500.

In formulaic form: MAR \u003d 1500 * 100/500 \u003d 300%

That is, when investing in stocks, your margin will be 300%. Any businessman will tell you that this is a great investment. We will not consider the possibilities of the stock market, but you need to understand that this activity has its own risks. Therefore, it is up to you whether money matters to you.

Purpose of calculating margin

The purpose of calculating marginality is to assess the profitability of a business.

In order to correctly calculate marginality, you do not need to have a great knowledge of economics or investment finance. All you need is to use the above formulas. We recommend that you use a formula to determine the margin as a percentage.

This option will allow you to correctly assess the possibilities of your monetary investment. The margin interest rate will help determine the expected return over time. Guided by the correct assessment of the situation, you can choose the right solution.

Difference between margin and mark-up

The margin is the difference between the wholesale and retail price. And we have established earlier that marginality is the difference between profit and cost. So the markup is defined as the difference in relation to the cost price, and the margin will be determined by the difference between the price and the cost.

Thus, we have established formulas for determining marginality. Which option to choose is up to you. Properly defined marginality will allow you to settle your money more intelligently.

Margin is one of the determining factors in pricing. Meanwhile, not every beginning entrepreneur can explain the meaning of this word. Let's try to fix the situation.

The concept of "margin" is used by specialists in all spheres of the economy. This is usually relative magnitude, which is an indicator. In trade, insurance, banking margin has its own specifics.

How to calculate the margin

Economists understand margin as the difference between a product and its selling price. It reflects efficiency commercial activities, that is, an indicator of how successful the company is converting to.

Margin is a relative value expressed as a percentage. The formula for calculating the margin is as follows:

Profit / Income * 100 \u003d Margin

Let us give simplest example... It is known that the enterprise margin is 25%. From this we can conclude that each ruble of revenue brings the company 25 kopecks of profit. The remaining 75 kopecks are related to expenses.

What is Gross Margin

When assessing the profitability of a particular company, analysts pay attention to gross margin - one of the main indicators of the company's performance. The gross margin is determined by subtracting the cost of manufacturing the product from the proceeds from the sale.

Knowing only the value of the gross margin, one cannot draw conclusions about financial condition enterprise or to assess a specific aspect of its activities. But using this indicator, you can calculate others, no less important. In addition, gross margin, as an analytical indicator, gives an idea of \u200b\u200bthe company's performance. The formation of gross margin occurs due to the production of goods or the provision of services by employees of the company. It is based on labor.

It is important to note that the formula for calculating gross margin takes into account income that does not arise from the sale of goods or the provision of services. Non-operating income is the result of:

write-off of debts (receivables / payables);
measures for the organization of housing and communal services;
provision of services that are not industrial.

Knowing the gross margin, you can also find out the net profit.

Also, gross margin serves as the basis for the formation of development funds.

Talking about financial results, economists give credit to the profit margin, which is a measure of the profitability of sales.

Profit margin Is the percentage of profit in the total capital or revenue of the enterprise.

Banking margin

Analysis of banks' activities and the sources of their profit is associated with the calculation of four options for margin. Let's consider each of them:

1. Banking margin, that is, the difference between the rates on a loan and a deposit.
2. Credit margin, or the difference between the amount fixed in the contract and the amount actually given to the client.
3. Guaranteed margin - the difference between the value of the collateral and the amount of the loan issued.
4. Net interest margin (NIM) - one of the main indicators of the success of a banking institution. To calculate it, the following formula is used:
NIM \u003d (Fee and commission income - Fee expense) / Assets
When calculating the net interest margin, all assets, without exception, or only those that are currently used (generate income) can be taken into account.

Margin and trade margin: what's the difference

Oddly enough, not everyone can see the difference between these concepts. Therefore, one is often replaced by another. To understand the differences between them once and for all, let's recall the formula for calculating the margin:

Profit / Income * 100 \u003d Margin

(Selling price - Cost price) / Income * 100 \u003d Margin

As for the formula for calculating the margin, it looks like this:

(Sales price - Cost price) / Cost price * 100 \u003d Trade margin

For clarity, we will give a simple example. The product is purchased by the company for 200 rubles, and sold for 250.

So, this is what the margin will be in this case: (250 - 200) / 250 * 100 \u003d 20%.

And here is the trade margin: (250 - 200) / 200 * 100 \u003d 25%.

The concept of margin is closely related to profitability. In a broad sense, margin is the difference between what was given and what was given. However, margin is not the only metric used to measure performance. By calculating the margin, you can find out other important indicators economic activity enterprises.