Operating margin

Operating margin is a financial key indicator that shows how much of each krone of revenue is left once all operating costs have been deducted. It can also be seen as the relationship between operating profit and turnover. This can give analysts and investors an idea of how profitable the business is.

How it is calculated

Operating margin = (Operating revenue – Operating costs) / Operating revenue x 100

In other words, the operating margin is a percentage expressing how much the revenue exceeds the operating costs. The higher the operating margin, the more profitable the company's operations.

For example, if a business has operating revenue of NOK 1 million and operating costs of NOK 800 000, the operating margin is 20%. This means that for every krone of revenue the business has earned 20 øre in profit once all costs have been deducted.

What is the operating margin used for?

Operating margin is used to evaluate a business's profitability and efficiency by analysing how much profit it creates per krone of turnover.

A high operating margin indicates that the business is able to achieve a substantial profit from its operating activities, while a low operating margin can indicate inefficiency or high costs in operations. The operating margin can be compared with earlier periods in order to look for trends in the business's profitability, and it can also be compared with competitors in the same industry in order to assess relative profitability.

Tips for improving the operating margin

1. Reduce costs. Identify and analyse the business's cost structure carefully in order to find opportunities for cost reduction. This can include negotiating better prices with suppliers, making production processes more efficient, reducing unnecessary expenses and optimising the use of resources.
2. Raise prices. Consider the pricing of products or services carefully in order to make sure it is in line with the business's cost structure and the market's perception of value. Raising prices in line with quality and value can help increase revenue and improve the operating margin.
3. Increase sales volume. Explore opportunities to increase sales of products or services. This can include marketing and sales promotion measures, developing new markets or segments, improving customer satisfaction and loyalty, and extending the product range.
4. Focus on profitable products/services. Identify and focus on the products or services with higher profit margins. Prioritise the allocation of resources and the sales effort towards these profitable areas in order to increase the business's operating margin.
5. Make operating processes more efficient. Analyse and improve the business's operating processes in order to increase efficiency and reduce costs. This can include implementing technology, automating tasks, optimising inventory management and improving the workflow.
6. Monitor and control costs regularly. Establish a system for the continuous monitoring and control of costs. Review the cost structure regularly and identify areas where costs can be cut or optimised.

Remember that it is important to carry out thorough analyses and to consider the business's own situation and industry context in order to put in place the most relevant measures for improving the operating margin.

Read more about how Capassa gives you an overview of key figures such as the operating margin, with forecasts for the further development.