What numbers do you need before calculating?

Collect sales revenue, the cost of the goods or services sold, and the remaining business expenses. These are the inputs behind gross and net profit margin. CFI explains the distinction.

Give every input a clear label

Revenue is the sales amount used in the calculation. Profit is what remains after the relevant expenses. Cost of goods sold, often shortened to COGS, means the costs attributed to the products sold. Shopify explains these building blocks.

• Choose the period: write the month at the top of the worksheet.
• Check sales adjustments: identify refunds and discounts before entering revenue.
• Collect cost of sales: ask for the costs associated with that period's sales.
• List other expenses: review rent, advertising, payroll, interest and taxes.
• Flag uncertainty: mark missing or estimated amounts for follow-up.

Net sales means sales after returns, allowances and discounts. If your report already makes those adjustments, do not deduct them again. Wikipedia gives the net sales formula.

Keep a note beside every input showing where it came from. Use a sales report, a cost schedule or the relevant expense record. Before making a decision, ask your bookkeeper to resolve any line whose meaning is unclear.

For help locating the right lines, use the guide to reading small business financial statements. Bring your actual report to the exercise and mark the figures you will reuse each month.

How do gross, operating and net margin differ?

Each margin answers a different question about the same revenue. Gross margin deducts cost of sales; operating margin also deducts operating expenses; net margin includes all expenses, including interest and taxes. Shopify describes the three levels.

Work through one complete example

Hypothetical example: an online shop has $10,000 in monthly revenue and $6,000 in cost of sales. Its operating expenses are $2,000, with another $500 in interest and taxes. These figures illustrate the arithmetic, not a typical result or a customer case.

• Gross profit: $10,000 − $6,000 = $4,000. Gross margin: 40%.
• Operating profit: $4,000 − $2,000 = $2,000. Operating margin: 20%.
• Net profit: $2,000 − $500 = $1,500. Net margin: 15%.

In this example, every dollar of sales leaves 40 cents after product costs and 15 cents after all listed expenses. The calculations apply CFI's profit margin formulas.

Now replace the example with your own figures. Reconcile the expense total before accepting the result. If a cost already sits inside cost of sales, check that you have not entered it again under operating expenses.

In Excel or Google Sheets, divide the profit cell by the revenue cell and display the result as a percentage. When using percentage formatting, do not also multiply the formula by 100. Check your worksheet against the worked example before reusing it.

Why is profit margin different from markup?

Margin divides profit by the selling price. Markup divides the same difference by cost. Markup therefore answers how much you added to cost, rather than what share of sales remains. Wikipedia explains this denominator difference.

Ask what the percentage is based on

Consider the source's illustrative product with a $40 cost and a $100 selling price. The difference is $60. Gross margin is $60 ÷ $100 × 100 = 60%, while markup is $60 ÷ $40 × 100 = 150%. See the worked comparison.

Those calculations do not include the shop's other expenses. Do not label the $60 as net profit. On your own pricing sheet, write cost, selling price, gross profit, gross margin and markup in separate columns.

Before approving a discount, repeat the calculation using the proposed selling price. Then check what remains to cover the other expenses. Treat the result as one input to the decision, alongside the customer's response and your sales plan.

If your review points toward a price increase, use the guide to raising prices without losing customers to prepare the customer conversation. Keep the financial calculation and the communication plan together.

What does the percentage tell you about business health?

Read profit amount and margin side by side. The amount shows the earnings in money; the margin expresses those earnings relative to revenue. CFI defines margin as that relationship.

Use a comparison that answers a real question

Hypothetical comparison: a design studio earns $2,000 on revenue of $10,000 in one period and $2,000 on $20,000 in another. Its profit amount is unchanged, but its margin falls from 20% to 10%. The second period required twice the revenue for the same profit in this example.

Investigate before judging the change. Ask the team to identify extra delivery work, discounted projects or expenses that changed between periods. Attach evidence to each explanation instead of choosing the most convenient story.

A good profit margin percentage depends on the industry and the business's circumstances. Comparisons between companies can be misleading when their cost structures differ. Shopify discusses the context, and Wikipedia explains the comparison limits.

Start by comparing your own periods using consistent definitions. Put unusual items in a note beside the result. For a broader review, CFI recommends considering several performance measures together. See its financial analysis guidance.

Keep an upcoming-payment review alongside the margin worksheet. Use the guide to managing small business cash flow to plan that separate check.

Which change should you investigate first?

Choose the question that your figures make most visible. The prompts below are a proposed review method, not a diagnosis of your business. Open the underlying records before changing a price, supplier or budget.

• Gross margin changed: inspect product costs, selling prices and discounts.
• Gross margin stayed steady but net margin changed: review the other expense lines.
• A promotion looks weak: calculate its selling price and associated costs separately.
• A service looks profitable: review which delivery costs you included and which you omitted.

Write a small test you can actually review

For a hypothetical café, the task could be to recalculate the ingredient cost of one popular lunch item. For a marketing team, it could be to review the delivery costs of one recurring service package. Neither task assumes a saving before the records are checked.

Write down the proposed change, the person responsible and what you will compare afterward. Include a quality check, such as whether the agreed service was still delivered. Keep customer complaints and rework visible during the review.

Shopify identifies operating costs and pricing among the areas to examine when improving margins. Its guide explains these options. For a focused expense review, follow the steps for cutting small business costs.

How can you make this a useful monthly habit?

Use one worksheet and a short review agenda. Aim to leave the meeting with a checked result and a specific next action. The following is a suggested routine you can adapt to your business.

1. Enter revenue, cost of sales and the remaining expenses.
2. Check that the records cover the intended period.
3. Calculate profit amounts and the corresponding margins.
4. Compare with the previous period using the same definitions.
5. Write a supported explanation for the largest change.
6. Assign one investigation or decision to a named person.

Leave an unresolved line visibly unresolved. Do not quietly replace a missing figure with zero. Ask when the record will be available, and label the worksheet provisional until the relevant check is complete.

If you need help defining cost categories, prepare your questions using the guide to choosing an accountant for a small business. Bring a sample worksheet and ask the accountant to walk through one month with you.