Free calculator

Operating Margin Formula and Calculator

Operating margin is operating profit divided by revenue. It shows how much of each dollar of sales is left after the costs of running the business. Use the calculator, or watch Claude or ChatGPT work it out from a set of books.

Work it out here

Example figures from a sample month. Type over them with your own.

Operating margin 10.9%
Operating profit $48,700
Healthy
Cost of sales $268,000 60.1%
Operating expenses $129,300 29.0%
Operating profit $48,700 10.9%

You keep $0.11 of every $1 of sales after the costs of running the business. That's in the 10% to 20% range many businesses aim for.

Get your real operating margin from your books Connect QuickBooks, Xero or NetSuite, then ask Claude or ChatGPT.
Ask your own books

The formula: Operating profit ÷ Revenue × 100

Or ask Claude or ChatGPT

Kipper
Question:

What was our operating margin last month?

Answer:
  • Asking Kipper for last month's profit and loss…
  • Taking off cost of sales and running costs…
  • Leaving out interest and tax…
  • Dividing by revenue…

10.9%. That leaves $48,700 of operating profit on $446,000 of sales. The figures come from your profit and loss. The margin is my arithmetic.

Operating margin · August · Xero
August
Revenue$446,000
Operating profit$48,700
Operating margin10.9%
Question:

Why was last month's operating margin lower than the month before?

Answer:
  • Kipper is pulling July and August, line by line…
  • Finding the costs that grew…
  • Checking the bills behind them…
  • Working it out without them…

Two subcontractor bills that usually land in September came on August 28. Without them, it's 13.9%, the best of the three months.

Operating margin · Xero
Margin
July11.3%
August10.9%
August, without the early bills13.9%
Question:

How does last month's operating margin compare with our gross margin?

Answer:
  • Asking Kipper for revenue and costs by type…
  • Working out gross margin…
  • Adding running costs on top…

Gross margin only takes off cost of sales. Operating margin also takes off payroll, rent and software, which cost 29.0% of sales.

Margins · August · Xero
Share of sales
Gross margin39.9%
Running costs29.0%
Operating margin10.9%
Question:

Which running costs take the most?

Answer:
  • Kipper is reading last month's operating expenses…
  • Grouping them by type…
  • Sorting them by size…

Payroll, at $86,000. That's two-thirds of your running costs.

Running costs · August · Xero
Amount
Payroll$86,000
Rent and facilities$25,500
Software and tools$12,400
Depreciation and other$5,400
Question:

What's our net profit margin?

Answer:
  • Asking Kipper for interest and tax…
  • Taking them off operating profit…
  • Dividing by revenue…

10.1%. Net margin comes after interest and tax. Operating margin comes before them.

From operating profit to net profit · August
August
Operating profit$48,700
Interest and tax-$3,700
Net profit$45,000
Net profit margin10.1%
Reply to Claude…
Open the live demo

A recorded example. Open the interactive demo to ask your own questions.

The formula

How to calculate operating margin

Three steps, all from your profit and loss.

01

Start with revenue

Your total sales for the month or year, from the top of your profit and loss.

02

Take off cost of sales and running costs

Cost of sales, then payroll, rent, software and depreciation. What's left is operating profit.

03

Divide by revenue

Multiply by 100 for a percentage. Interest and tax come later, so leave them out.

Operating margin

Operating profit ÷ Revenue × 100

The sample month: $48,700 ÷ $446,000 = 10.9%.

Operating profit

Revenue − Cost of sales − Operating expenses

The same month: $446,000 − $268,000 − $129,300 = $48,700.

From net profit

Net profit + Interest + Taxes

$45,000 + $1,400 + $2,300 = $48,700. Both ways give the same answer.

Reading it

What is a good operating margin?

Many businesses aim for 10% to 20%. Software companies often run higher, and retailers and restaurants often run thinner. So compare yourself with businesses like yours.

Below 5%

A thin margin. A small rise in costs could wipe out your operating profit.

5% to 10%

Modest. There's some room, but not much if costs climb.

10% to 20%

The range many businesses aim for. Running costs are under control.

10.9% the sample business

Above 20%

Strong for most industries. Software businesses often run here.

In your books

Find operating profit on your profit and loss

Everything you need is on one report. Operating profit sits between gross profit and net profit.

  • Running costs come after gross profit.
  • Operating profit sits above interest and tax. Some reports call it operating income.
  • Divide it by revenue. Here, that's $48,700 ÷ $446,000 = 10.9%.
Profit and loss · August Sample business
Revenue $446,000
Cost of sales $268,000
Gross profit 39.9% $178,000
Payroll $86,000
Rent and facilities $25,500
Software and tools $12,400
Depreciation and other $5,400
Operating profit 10.9% margin $48,700
Interest $1,400
Income tax $2,300
Net profit 10.1% $45,000

Related terms

Operating margin and the terms people mix it up with

Each one is a different cut of profit. Here's what it means and how to work it out.

Operating margin

Operating profit as a share of revenue. Also called operating profit margin.

Operating profit ÷ revenue × 100

Operating profit

Revenue less cost of sales and running costs. Often called operating income or EBIT.

Revenue − cost of sales − operating expenses

Gross margin

What's left after cost of sales only.

Gross profit ÷ revenue × 100

Net profit margin

What's left after every cost, including interest and tax.

Net profit ÷ revenue × 100

EBITDA margin

Operating profit with depreciation and amortization added back.

EBITDA ÷ revenue × 100

Operating expense ratio

Running costs as a share of revenue.

Operating expenses ÷ revenue × 100

Side by side

A calculator vs asking your books

A calculator works out the figures you type. Here's what changes when Claude or ChatGPT can read your books instead.

Finding the figures
Typing the numbers

Pick each line off your profit and loss by hand.

Connected to your books

Read straight off your profit and loss.

What counts as running costs
Typing the numbers

Easy to leave interest or tax in by mistake.

Connected to your books

Each line is listed, so you can check it.

Why it moved
Typing the numbers

Compare two months of reports yourself.

Connected to your books

Ask why it dipped, and see the costs that grew.

Next month
Typing the numbers

Find the figures and type them in again.

Connected to your books

Ask the same question. The figures are current.

Trusting the answer
Typing the numbers

It's only as good as what you typed.

Connected to your books

Every figure traces back to your books.

Connect your books and skip the typing

Start free, connect QuickBooks, Xero or NetSuite, and ask for your real operating margin.

Ask your own books See pricing

Both assistants

Use Claude or ChatGPT: Kipper works with both

Your team can use Claude or ChatGPT to work out operating margin and ask follow-up questions. Either way, the figures come straight from your books. Click a card to see it in the demo.

Kipper
Question:

What was our operating margin last month?

Answer:
  • Asking Kipper for last month's profit and loss…
  • Taking off cost of sales and running costs…
  • Leaving out interest and tax…
  • Dividing by revenue…

10.9%. That leaves $48,700 of operating profit on $446,000 of sales. The figures come from your profit and loss. The margin is my arithmetic.

Operating margin · August · Xero
August
Revenue$446,000
Operating profit$48,700
Operating margin10.9%
Question:

Why was last month's operating margin lower than the month before?

Answer:
  • Kipper is pulling July and August, line by line…
  • Finding the costs that grew…
  • Checking the bills behind them…
  • Working it out without them…

Two subcontractor bills that usually land in September came on August 28. Without them, it's 13.9%, the best of the three months.

Operating margin · Xero
Margin
July11.3%
August10.9%
August, without the early bills13.9%
Question:

How does last month's operating margin compare with our gross margin?

Answer:
  • Asking Kipper for revenue and costs by type…
  • Working out gross margin…
  • Adding running costs on top…

Gross margin only takes off cost of sales. Operating margin also takes off payroll, rent and software, which cost 29.0% of sales.

Margins · August · Xero
Share of sales
Gross margin39.9%
Running costs29.0%
Operating margin10.9%
Question:

Which running costs take the most?

Answer:
  • Kipper is reading last month's operating expenses…
  • Grouping them by type…
  • Sorting them by size…

Payroll, at $86,000. That's two-thirds of your running costs.

Running costs · August · Xero
Amount
Payroll$86,000
Rent and facilities$25,500
Software and tools$12,400
Depreciation and other$5,400
Question:

What's our net profit margin?

Answer:
  • Asking Kipper for interest and tax…
  • Taking them off operating profit…
  • Dividing by revenue…

10.1%. Net margin comes after interest and tax. Operating margin comes before them.

From operating profit to net profit · August
August
Operating profit$48,700
Interest and tax-$3,700
Net profit$45,000
Net profit margin10.1%
Reply to Claude…
Open the live demo

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FAQ

Operating margin questions

What people ask about operating margin, and how to work it out.

It's operating profit as a share of revenue. It shows how much of each dollar of sales is left after the costs of running the business, before interest and tax.
Operating margin = operating profit ÷ revenue × 100. Operating profit = revenue − cost of sales − operating expenses.
Take cost of sales and running costs off revenue to get operating profit. Then divide by revenue and multiply by 100. In the sample month, $48,700 ÷ $446,000 = 10.9%.
Yes. They're two names for the same figure. You'll also see it called operating income margin.
Many businesses aim for 10% to 20%, and above 20% is strong. Under 5% is thin. It varies a lot by industry, so compare yourself with businesses like yours.
Gross margin only takes off cost of sales. Operating margin also takes off running costs like payroll and rent. You can work out gross margin with our gross margin calculator.
Net profit margin comes after interest and tax. Operating margin comes before them. In the sample month, operating margin is 10.9% and net margin is 10.1%.
Usually. EBIT is earnings before interest and tax, which for most businesses is the same as operating profit.
EBITDA margin adds depreciation and amortization back first, so it's higher. Work it out with our EBITDA calculator.
The costs of running the business: payroll, rent, software, marketing and depreciation. Cost of sales, interest and income tax are separate.
Usually, yes. It means more of each sale is left after running costs. A very high margin can also mean the business is underinvesting, so check what's driving it.
Yes. If costs are higher than revenue, you've made an operating loss, and the margin is below zero.
Look for costs that grew faster than sales. In the sample business, two subcontractor bills came early and pulled August to 10.9%. Without them, it's 13.9%.
Raise prices, lower your cost of sales, or keep running costs from growing faster than sales. Each one leaves more of every dollar of revenue.
Yes, once it can see your books. Connected through Kipper, it reads your profit and loss from QuickBooks, Xero or NetSuite, read-only. Then it does the arithmetic and shows its work.
QuickBooks, Xero and NetSuite. Kipper reads the profit and loss from all three.

Get your real operating margin from your books

One read-only connection to QuickBooks, Xero or NetSuite. Then ask Claude or ChatGPT for your operating margin, and why it moved. We'll help you set it up.

Ask your own books Schedule a demo
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