Sales margin is a performance measuring statistic that helps to highlight the profitability of a specific product or service. It is a way of analyzing the effectiveness of distinct product lines. It is a measure of the success of a company and it helps a business’ management, as well as probable investors, determine how well off a company’s sales, profits and margins are. The sales margin is also known as the contribution margin and the higher it is for a product, the more the product’s potential.
Business margins, in general, are used to determine the value of extra units or sales in this case. They are pivotal in determining pricing as well as in making promotional decisions. Sales margins are key factors in many business decisions such as budgets and forecasts.
All managers strive to at least approximate their business margins although how they approximate their values differs across companies. Comparison with other same sized same industry companies while struggling to keep a strong sales margin is vital to a company’s long-term survival and growth.
Calculating the sales margin
Sales margins are calculated for specific time periods, such as a month, quarter yearly, bi-annually or annually. Businesses keep these time frames constant for all calculation so as to ease comparisons.
In calculating the sales margin of a product line, the cost of goods is subtracted from the net sales and to this figure, any sales returns are added to obtain the gross profit margin of the product. The sales expense is then subtracted from the gross profit margin to now show the profits of a product without the administrative overheads application. The gross sales are then used to divide this figure to give the sales margin.
Sales margin = [gross profit margin – cost of sales] / gross sales
Gross profit margin = net sales – sales expense + any sales returns
The cost of sales of a product is the cost associated with the running of the sales department. These costs include sales labor, customer service, advertising and promotions, shipping costs, warranty, travel, entertainment and expense reimbursement. For a company that deals with manufacturing or assembly, then, included in the cost of sales, is the cost of constituent parts or raw materials.
Suppose a company had gross sales of $60,000 in a particular month. If the calculated cost of sales was $40,000, then the sales margin is $20,000 which is 33.3% per month when divided by the gross sales.