What is marginality in simple words? Margin - what is it in simple words

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

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

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

Remember the joke about 3%, where a not very distant businessman explains that he lives on only three percent, buying something for 100 rubles and selling for 300. But such discrepancies actually occur not only in questionnaires. People, for example, often confuse margin and markup, and then have to spend a long time trying to figure out which partner was wrong.

In simple words about margin

There are several words that are very close in meaning and mean almost the same thing - these are the words profit, markup and, of course, margin. Today we will focus on marginality, but we will definitely mention how they differ from each other, so that later we can speak the same language with business partners without any “misunderstandings” arising.

Historically, the word margin comes from the English “margin”, which, as is usual in the great and mighty Russian language, has dozens of meanings. For example, in a series of articles about website 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 notorious profit that a businessman increases relative to the base cost something (product, service). In the most general sense, this is the difference in the price of a product at different stages of its movement on 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's important to remember - the margin can never be greater 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 margin with the so-called trade margin, which again can be expressed in both absolute and relative units. Moreover, in absolute units both the margin and markup will be the same, but in relative terms they will be different. All the confusion arises precisely when margins are calculated as percentages. Why is this happening? Let me show you with an example.

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

But the relative values ​​of margin and trading margin are calculated differently. Margin in percent- this is 300 - 100 divided by 300 (and, of course, multiplied by 100%). And the trade margin as a percentage is 300 - 100 divided by 100 (multiplied by 100%).

You can see for yourself that the margin in our example will be equal to 66% (significantly less than 100%, although the intermediary tripled the price of the goods), but the trade margin will be exactly that same 300%. It's clear? We felt the difference. Therefore, it is important to understand very clearly what we are talking about - margins or trading margins, because as a percentage these result in completely different numbers (often differing significantly).

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

Well, well Margin differs from net profit the fact that additional costs are not taken into account here, for example, for temporary storage of goods, for their 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 the trade margin.

Margin 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. An exchange is, in fact, just a platform for transactions, and they make money there exactly the same as in life - buy cheaper and sell more expensive. Speculation is also speculation in Africa (and this word used to be a dirty word).

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

On such exchanges, you place bets on the fall or rise of the exchange rate (dollar, pound, euro, bitcoin or other altcoins). If you guessed the direction of the exchange rate, then your earnings will depend on how much the exchange rate changes in the direction you want.

The main thing here is to close in time, before the process of the rate moving in a different direction begins. Your profit will be equal to the margin from the transaction (the difference between starting price and closing price of the transaction). You can make money both on growth and on decline - it doesn’t matter.

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

It is true that the loss when margin trading with leverage will be the same number of times greater, so beginners are highly discouraged from starting to trade immediately with a large leverage, because there is a risk of losing everything quickly. It is noteworthy that in this case you risk only the money on deposit. You won’t be able to lose more than this and you won’t owe it to anyone (this is not a loan).

It’s as if they give you virtual money (in our example, increasing the real $10 to $1000 thanks to x100 leverage). In any case, even if you win, then at your own expense you you will only get profit from the transaction (the 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 $12 in total (increase your deposit).

If you lose, then the margin (negative, i.e. loss) will be deducted from the amount involved in the transaction. In our example, instead of betting $10, you will only have $8 left (the $10 bet minus the $2 loss). But with a large leverage, you can lose everything, and very, very quickly (literally in seconds), if you choose the wrong direction of movement of the exchange rate (dollar and cryptocurrency), and the exchange rate sharply goes 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 just as much. For beginners, as I already mentioned, margin trading with a leverage higher than two and three is highly not recommended. Pros can add margins in time and stay afloat even with an unsuccessful bet, waiting for the desired direction of the exchange rate movement. IMHO.

Good luck to you! To see you soon on the pages of the blog site

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For evaluation economic activity different indicators are used. The key is margin. IN in monetary terms it is calculated as a markup. As a percentage, it is the ratio of the difference between sales price and cost to the sales price.

 

It is necessary to periodically evaluate the financial activities of an enterprise. This measure will help identify problems and see opportunities, find weak points and strengthen its strong position.

Margin is economic indicator. It is used to estimate the amount of markup on the cost of production. It covers the costs of delivery, preparation, sorting and sale of goods that are not included in the cost, and also generates the profit of the enterprise.

It is often used to assess the profitability of an industry (oil refining):

Or justify making an important decision at a separate enterprise (“Auchan”):

It is calculated as part of the analysis financial condition companies.

Examples and formulas

The indicator can be expressed in monetary and percentage terms. You can count it either way. If expressed in rubles, then it will always be equal to the markup and is found according to the formula:

M = CPU - C, where

CP - selling price;
C - cost.
However, when calculating as a percentage, the following formula is used:

M = (CPU - C) / CPU x 100

Peculiarities:

• cannot be 100% or more;
• helps analyze processes in dynamics.

An increase in product prices should lead to an increase in margins. If this does not happen, then the cost is rising faster. And in order not to be at a loss, it is necessary to reconsider the pricing policy.

Attitude towards markup

Margin ≠ Markup when expressed as a percentage. The formula is the same with the only difference - the divisor is the cost of production:

N = (CP - C) / C x 100

How to find by markup

If you know the markup of a product as a percentage and another indicator, for example, the selling price, calculating the margin is not difficult.

Initial data:

• markup 60%;
• sale price - 2,000 rub.

We find the cost: C = 2000 / (1 + 60%) = 1,250 rubles.

Margin, respectively: M = (2,000 - 1,250)/2,000 * 100 = 37.5%

Resume

It is useful to calculate the indicator small businesses and large corporations. It helps to assess the financial condition, allows you to identify problems in pricing policy enterprises and take timely measures not to miss profits. Calculated equally with net and gross profit, for individual goods, product groups and the entire company as a whole.

The economic term “margin” is used not only in trade and stock exchange operations, but also in insurance and banking. This term describes the difference between the trade value of a product, which is paid by the buyer, and its cost, which consists of production costs. For each field of activity, the term will have its own specific use: in exchange activities, this concept describes the difference in rates securities, interest rates, quotes or other indicators. This is a rather unique, non-standard indicator for stock exchange transactions. In terms of brokerage operations on stock markets the margin acts as collateral, and trading is called “margin”.

In the activities of commercial banks, margin describes the difference between interest on issued loan products and existing deposits. One of the popular concepts in banking is “credit margin”. This term helps describe the difference obtained if the agreed amount is subtracted from the final loan amount issued to bank clients. Another indicator that directly describes the efficiency of banking activities can be considered “net margin” expressed as percentages. The calculation is made by finding the difference between capital and net income, measured as a percentage. For any bank, net income is generated through the sale of credit and investment products. When issuing a loan amount secured by property, to determine the profitability of the transaction, the “guarantee margin” is calculated: the amount of the loan amount is subtracted from the value of the collateral property.

This term simplifies the concept of profit. The indicator can be expressed in:

• percent (calculated as the ratio between the difference between the cost and the cost of goods to the cost);
• in absolute terms – rubles (calculated as a trade margin);
• ratio of shares (for example, 1:4, used less frequently than the first two).

Thanks to this indicator, the costs of delivery, product rejection, and sales organization, which are not reflected in the cost of the product, are reimbursed. It also contributes to the formation of the company's profit.

If the margin does not increase with an increase in trading value, this means that the cost of goods is increasing faster, and the company risks soon becoming unprofitable. To prevent this from happening, the pricing of the product must be adjusted.

This indicator is relevant for calculations for both large and small organizations. Let's summarize why it is needed:

• analysis of the organization's profitability;
• analysis of the financial condition of the organization, its dynamics;
• when making a responsible decision, in order to justify it;
• forecasting the profitability of possible clients of the organization;
• formation of pricing policies for certain groups of goods.

Used in analysis financial activities on a par with net and gross profit for both individual goods or their groups, and the entire organization as a whole.

Gross margin is revenue from sales of products for a certain period from which variable costs allocated for the production of these products are subtracted. This is an analytical indicator, which, when calculated, may include income from other activities of the enterprise: the provision of non-production services, income from the commercial use of housing and communal services and other activities. The gross margin determines the net profit and the fund allocated for production development. That is, when economic analysis activity of the entire enterprise, it will reflect its profitability, through the share of profit in total volume proceeds.

How to calculate margin

The margin is calculated based on the ratio in which it will be expressed end result: absolute or percentage.

The calculation can be made if the trade margin and the final cost of the goods are accurately indicated. These data make it possible to determine mathematically the margin, expressed as a percentage, since these two indicators are interrelated. First, the cost is determined:

Total cost of goods – Trade margin = Cost of goods.

Then we calculate the margin itself:

(Total cost – Product cost)/Total cost X 100% = Margin.

Due to different approaches to understanding margin (as a profit ratio or as net profit), there are different methods for calculating this indicator. But both methods help in the assessment:

— the possible profitability of the launched project and its prospects for development and existence;

- quantities life cycle goods;

— determining the effective volumes of production of goods and products.

Margin formula

If we need to express the indicator through percentages, in trading operations the formula is used to determine the margin:

Margin = (Product Cost – Product Cost) / Product Cost X 100%.

If we express the indicator in absolute values ​​(foreign or national currency), we use the formula:

Margin = Product Cost – Product Cost.

What is marginality

Most often, marginality describes the increase in capital in monetary terms per unit of production. In general terms, this is the difference between production costs and the profit received as a result of product sales.

Marginality in commerce is the marginal profit of a product, subject to the minimum cost and the maximum possible markup. In this case, they talk about the high profitability of the enterprise. If a product is sold at a high price, the investment in production is large, but with all this, the profit barely compensates for the costs - we are talking about low margin, since in this case the profitability ratio (margin) will be quite low. Using the concept of “profitability ratio,” we take 100% of the cost of the product paid by the consumer. The profitability of the enterprise is higher, the higher this ratio is.

The marginality of a business or enterprise is its ability to obtain net income from invested capital for a certain period, measured as percentage.

The procedure for determining margin is carried out not only at the initial stage of launching a product (or a company as a whole), but also throughout the entire production period. Constant calculation of margin allows you to adequately assess the possible influx of income and the more sustainable the business development will be.

It should be noted that in Russia and Europe different approaches to understanding margins. For Russia, a more typical approach is where this concept is considered to be net gross income. Another analogue this concept– amount of coverage. In this case, the emphasis is on this amount as part of the revenue that forms the profit of the enterprise and is responsible for covering costs. The main principle here is to increase the organization’s profit in proportion to the reimbursement of production costs.

The European approach tends to reflect the gross margin as a percentage of the total income received after the sale of the product, from which the costs associated with the production of the product have already been deducted.

The main difference between the approaches is that the Russian one operates with net profit in monetary units, the European one relies on percentage indicators and is more objective in assessing the financial well-being of the organization.

When calculating marginality, economists pursue the following goals:

• assessment of the prospects of a specific product on the market;
• what is its “lifespan” on the market;
• the relationship between the prospects or risks of introducing a product to the market and the success of the launched enterprise.

It is important to calculate the marginality of a product for those companies that produce several types or groups of goods. At the same time, we obtain marginality indicators that can clearly show which of the goods have a better chance of future production, and the production of which can, or even should, be abandoned.

Margin and markup - their difference

If we express the margin as a percentage, then in this case it is impossible to say that it can be equated to a markup. When calculating in this case, the markup will always be greater than the margin. Also in this case it can be more than 100% (unlike the expression in absolute values, where it cannot be more than 100%). Example:

Markup = (price of goods (2000 rubles) – cost of goods (1500 rubles)) / cost of goods (1500 rubles) X 100 = 33.3%

Margin = price of the product (2000 rub.) – cost of the product (1500 rub.) = 500 rub.

Margin = (product price (2000 rubles) – cost of goods (1500 rubles))/product price (2000 rubles) X 100 = 25%

If we consider in absolute terms, then 500 rubles. – this is margin = markup, but when calculated as a percentage, margin (25%) ≠ markup (33.3%).

The markup as a result means the ratio of profit to the cost, and the margin is the ratio of profit to the trading value of the product.

Another nuance through which you can identify the difference between the concepts of “markup” and “margin”: the markup can be considered as the difference between the wholesale and retail cost of a product, and the margin as the difference between cost and cost.

In professional economic analysis, it is important not only to calculate the indicator mathematically correctly, but also to take the initial data necessary for specific circumstances and correctly use the results obtained. Using certain calculation methods, you can obtain data that differs from each other. But taking into account the conventionality of the considered indicators, for a complete and effective description economic condition organizations perform additional analysis on other indicators.

Often economic terms ambiguous and confusing. The meaning contained in them is intuitive, but rarely does anyone succeed in explaining it in publicly accessible words, without prior preparation. But there are exceptions to this rule. It happens that a term is familiar, but upon in-depth study it becomes clear that absolutely all its meanings are known only to a narrow circle of professionals.

Everyone has heard, but few people know

Let’s take the term “margin” as an example. The word is simple and, one might say, ordinary. Very often it is present in the speech of people who are far from economics or stock trading.

Most believe that margin is the difference between any similar indicators. In daily communication, the word is used in the process of discussing trading profits.

Few people know absolutely all the meanings of this fairly broad concept.

However to modern man It is necessary to understand all the meanings of this term, so that at an unexpected moment you “don’t lose face.”

Margin in economics

Economic theory says that margin is the difference between the price of a product and its cost. In other words, it reflects how effectively the activities of the enterprise contribute to the transformation of income into profit.

Margin is a relative indicator; it is expressed as a percentage.

Margin=Profit/Revenue*100.

The formula is quite simple, but in order not to get confused at the very beginning of studying the term, let's consider a simple example. The company operates with a margin of 30%, which means that in every ruble earned, 30 kopecks constitute net profit, and the remaining 70 kopecks are expenses.

Gross Margin

In analyzing the profitability of an enterprise, the main indicator of the result of the activities carried out is the gross margin. The formula for calculating it is the difference between revenue from sales of products during the reporting period and variable costs for the production of these products.

The level of gross margin alone does not allow for a full assessment of the financial condition of the enterprise. Also, with its help, it is impossible to fully analyze individual aspects of its activities. This is an analytical indicator. It demonstrates how successful the company is as a whole. is created due to the labor of enterprise employees spent on the production of products or provision of services.

It is worth noting one more nuance that must be taken into account when calculating such an indicator as “gross margin”. The formula can also take into account income outside of sales economic activity enterprises. These include writing off accounts receivable and payable, providing non-industrial services, income from housing and communal services, etc.

It is extremely important for an analyst to correctly calculate the gross margin, since enterprises, and subsequently development funds, are formed from this indicator.

In economic analysis, there is another concept similar to gross margin, it is called “profit margin” and shows the profitability of sales. That is, the share of profit in total revenue.

Banks and margin

Bank profit and its sources demonstrate a number of indicators. To analyze the work of such institutions, it is customary to count as many as four various options margin:

Credit margin is directly related to work under loan agreements and is defined as the difference between the amount specified in the document and the amount actually issued.

Bank margin is calculated as the difference between interest rates on loans and deposits.

Net interest margin is key indicator efficiency of banking activities. The formula for its calculation looks like the ratio of the difference in commission income and expenses for all operations to all bank assets. Net margin can be calculated based on all bank assets, or only on those currently involved in work.

The guarantee margin is the difference between the estimated value of the collateral property and the amount issued to the borrower.

Such different meanings

Of course, economics does not like discrepancies, but in the case of understanding the meaning of the term “margin” this happens. Of course, on the territory of the same state, everyone is completely consistent with each other. However, the Russian understanding of the term “margin” in trade is very different from the European one. In the reports of foreign analysts, it represents the ratio of profit from the sale of a product to its selling price. In this case, the margin is expressed as a percentage. This value is used for relative efficiency assessment trading activities companies. It is worth noting that the European attitude towards margin calculation is fully consistent with the basics economic theory, which were written above.



In Russia, this term is understood as net profit. That is, when making calculations, they simply replace one term with another. For the most part, for our compatriots, margin is the difference between revenue from the sale of a product and overhead costs for its production (purchase), delivery, and sales. It is expressed in rubles or other currency convenient for settlements. It can be added that the attitude towards margin among professionals is not much different from the principle of using the term in everyday life.

How does margin differ from trading margin?

There are a number of common misconceptions about the term “margin”. Some of them have already been described, but we have not yet touched on the most common one.



Most often, the margin indicator is confused with the trading margin. It's very easy to tell the difference between them. The markup is the ratio of profit to cost. We have already written above about how to calculate margin.

A clear example will help dispel any doubts that may arise.

Let’s say a company bought a product for 100 rubles and sold it for 150.

Let's calculate the trade margin: (150-100)/100=0.5. The calculation showed that the markup is 50% of the cost of the goods. In the case of margin, the calculations will look like this: (150-100)/150=0.33. The calculation showed a margin of 33.3%.

Correct analysis of indicators

For a professional analyst, it is very important not only to be able to calculate an indicator, but also to give a competent interpretation of it. This difficult work which requires
great experience.

Why is this so important?

Financial indicators are quite conditional. They are influenced by valuation methods, accounting principles, the conditions in which the enterprise operates, changes purchasing power currencies, etc. Therefore, the resulting calculation result cannot be immediately interpreted as “bad” or “good”. Additional analysis should always be performed.

Margin on stock markets

Exchange margin is a very specific indicator. In the professional slang of brokers and traders, it does not mean profit at all, as was the case in all the cases described above. Margin on stock markets becomes a kind of collateral when making transactions, and the service of such trading is called “margin trading”.



The principle of margin trading is as follows: when concluding a transaction, the investor does not pay the entire contract amount in full, he uses his broker, and only a small deposit is debited from his own account. If the outcome of the operation carried out by the investor is negative, the loss is covered from the security deposit. And in the opposite situation, the profit is credited to the same deposit.

Margin transactions make it possible not only to make purchases at the expense of borrowed funds broker. The client may also sell borrowed securities. In this case, the debt will have to be repaid with the same securities, but their purchase is made a little later.

Each broker gives its investors the right to make margin trades independently. At any time, he may refuse to provide such a service.

Benefits of Margin Trading

By participating in margin transactions, investors receive a number of benefits:

• Possibility to trade on financial markets without having sufficiently large amounts in the account. This makes margin trading highly profitable business. However, when participating in operations, one should not forget that the level of risk is also not small.

  Opportunity to receive when the market value of shares decreases (in cases where the client borrows securities from a broker).

  To trade different currencies, it is not necessary to have funds in these particular currencies on your deposit.

Risk management

To minimize the risk when concluding margin transactions, the broker assigns each of its investors a collateral amount and a margin level. In each specific case, the calculation is made individually. For example, if after a transaction occurs on the investor’s account negative remainder, the margin level is determined by the following formula:

UrM=(DK+SA-ZI)/(DK+SA), where:

DK - cash investor deposited;

CA - the value of shares and other investor securities accepted by the broker as collateral;

ZI is the debt of the investor to the broker for the loan.

It is possible to carry out an investigation only if the margin level is at least 50%, and unless otherwise provided in the agreement with the client. According to general rules, the broker cannot enter into transactions that would result in the margin level falling below the established limit.



In addition to this requirement, for carrying out margin transactions on the stock markets, a number of conditions are put forward, designed to streamline and secure the relationship between the broker and the investor. To be negotiated maximum size losses, debt repayment terms, conditions for changing the contract and much more.

Understand all the diversity of the term "margin" for short term quite difficult. Unfortunately, it is impossible to talk about all areas of its application in one article. The above discussions indicate only the key points of its use.

If the cost of promoting a project is 10 thousand, and the client paid 15 thousand for services, then the project margin is 5 thousand. But do not confuse margin with markup. In monetary terms they are equal, but in percentage terms the margin is always lower, because it relates to revenue, not cost.

As a percentage, the margin is calculated as follows:

Margin = Revenue - Cost / Revenue x 100

Total project margin - 33%

The margin indicator forms the profitability of a business - that is, its ability to generate profit on invested capital. By the way, marginality is the same as profitability.

Margin = Profitability

What is the project margin in marketing agencies? This is how profitable each completed project is. Therefore, the margin is calculated for each project separately.

There are several margin metrics depending on what expenses are included in the margin formula.

The indicator used to calculate business profitability is net margin.

Net profit margin is the money that remains in the company after all bills have been paid, including CEO compensation.

The universal formula for calculating margin looks like this:

Net Margin = Net Profit / Revenue *100%

Western agencies consider 20-25% a good margin. Margins are over 10% too normal indicator. If the agency is at a growth stage and invests part of its profits in development, then you need to be prepared for a smaller margin.

The marketing platform surveyed nearly eight hundred heads of departments and top managers of marketing agencies from the US, UK and Canada. They provided data on their companies' margins:

Gross Margin

Gross profit margin (gross margin) is the money that remains in the agency after deducting direct project costs.

That is, this does not include overhead costs not directly related to specific project: rent, public utilities, salary of administrative staff, etc.. The normal gross margin for a marketing agency is considered to be 50-60%.

In addition, large Western agencies calculate operating margin (the share of operating profit in the company's turnover), PBIT margin (profitability before accounting financial income and payment of taxes), PBT (profitability before taxes).

Margin and markup

The concepts of margin and markup are often mistakenly equated, but these are different things! Margin shows how profitably a company operates and is calculated when the service has already been sold.

And a markup is how much a company adds on top of the cost of its services in order to bill the client.

The values ​​of the markup and margin do not coincide: the markup is added only to the cost price, and the margin is calculated from the sum of the cost price and the markup. Therefore, the margin value is always lower.

Margin< Наценка

Why calculate the project margin?

Margin is an important indicator of the profitability of the entire marketing agency and each implemented project separately. Apart from margins, it is unclear how profitable the business is or where it is heading.

With the correct project-based calculation of margin, you can determine:

• what is the marginality of each project and the business as a whole?
• dynamics of company profitability
• most valuable clients
• which projects require the most resources
• where does gross income go?
• how employee salaries affect project margins
• how much money does each service bring in?

Based on the data obtained, appropriate management decisions. For example, reduce costs, increase the cost of services, abandon unprofitable projects.

How to calculate the margin of a marketing/advertising project

To understand how to calculate project margins in practice, look at this simplified algorithm:

Step 1 - man-hour cost

Determine the cost per hour of work for each employee. First, calculate your annual earnings.

For full-time employees, this will include:

1. gross salary
2. pension contributions
3. insurance and bonuses
4. other payments.

Then calculate the number of hours worked per year: multiply 40 hours worked per week by 52 weeks of the year and subtract days of paid vacation, sick leave and national holidays. Now divide the annual salary for labor by the number of working hours.

Cost of man-hour = Annual salary / Number of working hours per year

Calculate the cost of freelancers in a similar way. It's even easier because they usually work on an hourly basis.

Knowing the cost of a man-hour and the time spent on a project, we will determine the direct costs of this project.

Step 2 - Overhead

To determine the net margin, you need to calculate not only direct costs, but also overhead costs for the year.

Overhead costs include all expected costs that cannot be attributed to a specific project:

• working hours that are not related to a specific project
• administrative staff salaries
• rent
• public utilities
• insurance
• transport
• payment for entertainment
• office equipment
• Software, hosting, tools.

Add up all the overhead costs for the year; they also need to be taken into account when calculating the project’s margin, along with direct labor costs.

Step 3 - Overhead per hour

First, calculate the sum of paid hours of all employees for the year - multiply the number of employees by working hours per year.

Now divide the annual overhead by the billable hours:

Overhead per hour = Amount of overhead / Amount of billable hours

Step 4 - Gross and Net Margin for Each Client

Gross Margin = Gross Sales - Sum of Hours Worked * Cost of Man Hour

To calculate net margin, you also need to take into account overhead costs.

Net Margin = Gross Sales - Sum of Hours Worked * (Cost of Man Hours +
+ Overhead per hour)

In practice, the calculation algorithm is much more complicated: the agency employs specialists with different payments labor, projects can be long-term or one-time, some of the work can be transferred to a subcontractor. But the principle of counting is correct.

If you are not happy with the result, you may be doing something wrong. Here are the typical mistakes of digital agencies that lead to a decrease in business margins.

Perhaps you:

1. you do the work for free: you perform client tasks that are not included in the agreed scope of the project. Why does this happen: it is always difficult to refuse, but it is not difficult to provide a small service at your own expense. But while working on major project Such tasks can accumulate to a significant amount. If you deliberately do this to earn the client's loyalty, be sure to announce that you are giving him a gift. Otherwise he will perceive free services for granted!
2. do not take into account all the time spent on the project: you and your team members neglect detailed timing. Consider all time spent on the project, both paid and unpaid. If you are working for hourly pay, and you don’t know exactly how much time and resources you spent on the project, you won’t be able to issue a correct invoice. If you work at a fixed rate, then time tracking is needed to understand how effectively you are using your time and resources.
3. do not work on errors after the project is closed: you do not discuss the project with the team and do not look for ways to improve activities, which means you repeat the same mistakes over and over again. Organize an hour-long meeting after closing the project and, together with your team, answer just three questions: “what was done well?”, “what didn’t work?” and “what should we do differently next time?” Something like Scrum.
4. underestimate the cost: you are too optimistic in matters of time and resources and are afraid to raise the price tag so as not to lose a client. Constantly improve your project cost calculations and check with your competitors. Record the cost of typical marketing operations in a journal and make changes on time.
5. reduce prices during negotiations with potential client, because you are afraid of missing out on a deal, with the intention of compensating for this drawdown in the process. But it’s usually not possible to compensate - either the customer is not too happy with you anyway, or the budget was cut, or the scope of work was sharply reduced.

Margin calculation and project management applications

Quite simple , calculates net and gross margin, margin including taxes, markup. In total, the resource has several dozen calculators, including four marketing ones.

Ultimate Margin Calculator by Lemonade Stand

The calculator is suitable for large agencies with a large number clients and employees. But it can also be customized small company of 3-4 employees.

TrinityP3 calculator

Which calculates the annual and hourly salary, the amount of billable hours and the overhead and margin multiplier. There are applications for Android and iOS.

Verdict

Margin is a key indicator
financial efficiency of business

Calculating the margin of each project allows you to analyze the agency’s order portfolio and adjust the work. Not calculating margins means running a business blindly.