Margin and markup in simple terms. Margin - what is it in simple words. Benefits of margin trading

Hello dear colleague! In today's article, we will talk about such a well-known economic term as margin. Many aspiring entrepreneurs, as well as procurement participants, have no idea what it is and how it is calculated. This term, depending on the area in which it is used, has different meanings. Therefore, in this article we will consider the most common types of margin and dwell in detail on the margin in trading. it is she who is of greatest interest to suppliers participating in government and commercial tenders.

1. What is margin in simple terms?

The term "margin" is most commonly found in areas such as trading, stock trading, insurance and banking. Depending on the field of activity in which this term is used, it can have its own specifics.

Margin (from the English. Margin - difference, advantage) - the difference between the prices of goods, stock prices, interest rates and other indicators. This difference can be expressed both in absolute terms (for example, ruble, dollar, euro) and as a percentage (%).

In simple words, margin in trade is the difference between the cost of a product (its manufacturing cost or purchase value) and its final (selling) price. Those. it is a certain indicator of the efficiency of economic activity of a particular company or entrepreneur.

In this case, it is a relative value, which is expressed in% and is determined by the following formula:

M \u003d P / D * 100%,

P - profit, which is determined by the formula:

P \u003d selling price - cost price

D - income (selling price).

In industry, the margin rate is 20% , and in trade - 30% .

However, I want to note that the margin in our and the Western understanding is very different. For European colleagues, it is the ratio of the profit from the sale of a product to its selling price. For us, for the calculation, net profit is used, namely (selling price - cost price).

2. Types of margin

In this section of the article, we will consider the most common types of margin. So let's get started ...

2.1 Gross (gross) margin

Gross margin (English gross margin) is the percentage of the company's total revenue that it retains after incurred direct costs associated with the production of its goods and services.

Gross Margin is calculated using the following formula:

VM \u003d (VP / OP) * 100%,

VP - gross profit, which is defined as:

VP \u003d OP - SS

OP - sales volume (revenue);
CC is the cost of goods sold;

Thus, the higher a company's BM value, the more funds the company saves for each ruble of sales to service its other expenses and obligations.

The ratio of VM to the amount of proceeds from the sale of goods is called the gross margin ratio.

2.2 Profit margin

There is another concept that is similar to gross margin. This concept - profit margin ... This indicator determines the profitability of sales, i.e. the share of profit in the total volume of the company's revenue.

2.3 Variation margin

Variation margin - the amount paid / received by the bank or a trading participant on the exchange in connection with a change in the monetary obligation for one position as a result of its market adjustment.

This term is used in exchange activities. In general, there are a lot of calculators for stock traders to calculate the margin. You can easily find them on the Internet for this search query.

2.4 Net Interest Margin (Bank Interest Margin)

Net interest margin - one of the key indicators for assessing the effectiveness of banking. NIM is defined as the ratio of the difference between interest (commission) income and interest (commission) expenses to the assets of a financial institution.

The formula for calculating the NIM is as follows:

NPM \u003d (DP - RP) / BP,

DP - interest (commission) income;
RP - interest (commission) expenses;
AD - income-generating assets.

As a rule, the NIM indicators of financial institutions can be found in open sources. This indicator is very important for assessing the stability of a financial institution when opening an account in it.

2.5 Guarantee margin

Guarantee margin Is the difference between the value of the collateral and the amount of the loan issued.

2.6 Credit margin

Credit margin - the difference between the assessed value of the goods and the size of the credit (loan) issued by the financial institution for the purchase of this product.

2.7 Bank margin

Bank margin (bank margin) is the difference between the rates of loan and deposit interest, loan rates for individual borrowers, or interest rates for active and passive operations.

The BM indicator is influenced by the terms of loans issued, the storage periods of deposits (deposits), as well as the interest on these loans or deposits.

2.8 Front and back margin

These two terms should be considered together because they are related,

Front margin Is the profit from the margin, and back margin Is the profit received by the company from discounts, promotions and bonuses.

3. Margin and Profit: What's the Difference?

Some experts are inclined to believe that margin and profit are equivalent concepts. However, in practice, these concepts differ from each other.

Margin is the difference between indicators, and profit is the final financial result. The profit calculation formula is shown below:

Profit \u003d V - SP - KI - UZ - PU + PP - VR + VD - PR + PD

B - revenue;
SP - production cost;
KI - commercial costs;
UZ - management costs;
ПУ - interest paid;
PP - interest received;
BP - unrealized expenses;
VD - unrealized income;
ПР - other expenses;
PD - other income.

After that, income tax is charged on the resulting value. And after deducting this tax, it turns out - net profit .

Summarizing all of the above, we can say that when calculating the margin, only one type of costs is taken into account - variable costs, which are included in the cost of production. And when calculating profit, all expenses and incomes that the company incurs in the production of its products (or the provision of services) are taken into account.

4. What is the difference between the margin and the mark-up?

Very often, margin is mistakenly confused with a trading margin. Extra charge - the ratio of profit from the sale of goods to its cost. In order to avoid confusion anymore, remember one simple rule:

Margin is the ratio of profit to price, and markup is the ratio of profit to cost.

Let's try to determine the difference with a specific example.

Suppose you purchased an item for 1,000 rubles and sold it for 1,500 rubles. Those. the amount of the margin in our case was:

H \u003d (1500-1000) / 1000 * 100% \u003d 50%

Now let's define the margin size:

M \u003d (1500-1000) / 1500 * 100% \u003d 33.3%

For clarity, the relationship between margin and margin indicators is shown in the table below:

An important point: The trading margin is very often more than 100% (200, 300, 500 and even 1000%), but the margin cannot exceed 100%.

In order to better understand the difference between these two concepts, I suggest you watch a short video:

5. Conclusion

As you can already understand, margin is an analytical tool for assessing the performance of a company (with the exception of stock trading). And before increasing production, introducing a new product or service to the market, it is necessary to estimate the initial value of the margin. If you increase the selling price of a product, and the size of the margin does not increase, then this only indicates that the amount of costs for its production is also growing. And with such dynamics, there is a risk of being at a loss.

On this, perhaps, everything. Hopefully you now have the necessary understanding of what margin is and how it is calculated.

P.S .: If, after studying the above material, you still have questions, then ask them in the comments to this article. Be sure to like and share links to the article with your friends and colleagues on social networks.

Hello dear readers of the blog site. Those who, in one way or another, are faced with the topic of doing business or any other financial aspects of activities, have probably heard such a word as margin.

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

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

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

In simple words about margin

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

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 site 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 very notorious profit that a businessman winds up relative to the base cost anything (goods, services). In the most general sense, it is the difference in the price of a product at different stages of its movement in 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 is important to remember - margin can never be more 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 the margin with the so-called trade margin, which, again, can be expressed in both absolute and relative units. Moreover, in absolute terms, both the margin and the margin will turn out to be the same, but in relative terms, they will be different. All the confusion arises precisely in the case when the marginality is calculated as a percentage. Why is this happening? Let's show you with an example.

Let us have a product that we bought for 100 rubles, and we sell for 300 rubles (those same notorious three percent from the anecdote). In this case in absolute units both the margin and the mark-up will be calculated for the same formula: resale price minus purchase price. In our example, this will be 300 minus 100 \u003d 200 rubles. Everything is clear here and no one ever gets confused.

But the relative values \u200b\u200bof marginality and trade margin are calculated in different ways. Percentage margin Is 300 - 100 and divided by 300 (and, of course, multiplied by 100%). And the trade margin in percentage is 300 - 100 divided by 100 (multiplied by 100%).

You can see for yourself that the margin in our example will be 66% (much less than 100%, although the intermediary has tripled the price of the goods), but the trade margin will be exactly the same 300%. Clear? We felt the difference. Therefore, it is important to be very clear about what we are talking about - about marginality or about a trade margin, because in percentages these are completely different numbers (often differing at times).

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

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

Marginality and margin trading - what is it?

I'll torment you a little more. You may also hear the word "margin" relatively. The exchange is, in fact, only a platform for transactions and there they earn in the same way as in life - to buy at a lower price and sell at a higher price. It is speculation and speculation in Africa (and in fact earlier this word was abusive).

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

On such exchanges, you place bets on the fall or rise in the rate (dollar, pound, euro, bitcoin or other altcoins). If you guessed the direction of movement of the course, then your earnings will depend on how much the course changes in the direction you need.
The main thing here is to close in time, before the process of movement of the course in the other direction begins. Your profit will be equal to the margin on the trade (the difference between the initial price and the closing price of the trade). You can make money both on the rise and on the fall - this is not the point.

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

True, the loss in case of margin trading with leverage will be as many times greater, therefore, beginners are highly discouraged from starting trading immediately with large leverage, because there is a risk of losing everything quickly. It is noteworthy that in this case you risk only with the money on the deposit. You will not be able to lose more than this and will not be left to anyone (this is not a loan).

You are kind of given virtual money (in our example, increasing the real $ 10 to $ 1000 thanks to the x100 leverage). In any case, even if you win, then at your own expense you get only profit from the deal (the very notorious margin) plus the amount that you actually used (the virtual increase will remain virtual). In our example, betting $ 10, you will receive a total of $ 12 (increase your deposit).

If you lose, then the margin (negative, i.e. loss) will be deducted from the amount participating in the transaction. In our example, instead of $ 10 staked, you only have $ 8 left ($ 10 bet minus $ 2 loss). But with a large leverage, you can lose everything, and in general everything, and very, very quickly (literally in seconds), if you choose the wrong direction of the rate movement (dollar and cryptocurrency), and the rate will sharply go 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 the same way. For beginners, as I already mentioned, margin trading with leverage above two and three is highly discouraged. Pros, on the other hand, can add marginality in time and keep afloat even with an unsuccessful bet, waiting for the desired direction of the course. IMHO.

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

How to calculate the margin

Economists understand margin as the difference between a product and its selling price. It serves as a reflection of the effectiveness of the business, that is, an indicator of how successfully the company is converting to.

Margin is a relative value expressed as a percentage. The formula for calculating the margin is as follows:

Profit / Income * 100 \u003d Margin

Let's give a simple example. It is known that the enterprise margin is 25%. From this we can conclude that each ruble of revenue brings the company 25 kopecks of profit. The remaining 75 kopecks are related to expenses.

What is Gross Margin

When assessing the profitability of a company, analysts pay attention to gross margin - one of the main indicators of a company's performance. The gross margin is determined by subtracting the cost of manufacturing the product from the proceeds from the sale.

Knowing only the value of the gross margin, one cannot draw conclusions about the financial condition of the enterprise or evaluate a specific aspect of its activities. But using this indicator, you can calculate others, no less important. In addition, gross margin, as an analytical indicator, gives an idea of \u200b\u200bthe company's performance. The formation of gross margin occurs due to the production of goods or the provision of services by employees of the company. It is based on labor.

It is important to note that the formula for calculating gross margin takes into account income that does not arise from the sale of goods or the provision of services. Non-operating income is the result of:

write-off of debts (receivables / payables);
measures for the organization of housing and communal services;
the provision of services that are not industrial.

Knowing the gross margin, you can also find out the net profit.

Also, gross margin serves as the basis for the formation of development funds.

When it comes to financial results, economists give credit to profit margins, which is a measure of the return on sales.

Profit margin Is the percentage of profit in the total capital or revenue of the enterprise.

Banking margin

The analysis of banks' activities and the sources of their profit is associated with the calculation of four options for margin. Let's consider each of them:

1. Banking margin, that is, the difference between the rates on a loan and a deposit.
2. Credit margin, or the difference between the amount fixed in the contract and the amount actually given to the client.
3. Guaranteed margin - the difference between the value of the collateral and the amount of the loan issued.
4. Net interest margin (NIM) - one of the main indicators of the success of a banking institution. To calculate it, the following formula is used:
NIM \u003d (Fee Income - Fee Expenses) / Assets
When calculating the net interest margin, all assets, without exception, or only those that are used (generate income) at the present time can be taken into account.

Margin and trade margin: what's the difference

Oddly enough, not everyone can see the difference between these concepts. Therefore, one is often replaced by another. To understand the differences between them once and for all, let's remember the formula for calculating the margin:

Profit / Income * 100 \u003d Margin

(Selling price - Cost price) / Income * 100 \u003d Margin

As for the formula for calculating the margin, it looks like this:

(Sales price - Cost price) / Cost price * 100 \u003d Trade margin

For clarity, we will give a simple example. The product is purchased by the company for 200 rubles, and sold for 250.

So, this is what the margin will be in this case: (250 - 200) / 250 * 100 \u003d 20%.

And here is the trade margin: (250 - 200) / 200 * 100 \u003d 25%.

The concept of margin is closely related to profitability. In a broad sense, margin is the difference between what was given and what was given. However, margin is not the only metric used to measure performance. By calculating the margin, you can find out other important indicators of the economic activity of the enterprise.

Differences between margin and mark-up

Photos from the site: http: utmagazine.ru

For a favorable life of the company and the effective functioning of all its financial processes, it is necessary to have all the information on the income, expenses and costs of the company.

Often times, different pricing factors are called profit margins and are lumped together. Let's take a closer look at two of these ratios - margin and markup.

What is margin and markup

Most people believe that there is no difference between margin and markup, and often confuse or combine their indicators. Our article will help you understand how the markup differs from the margin.

Margin

There are several definitions of margin in economics textbooks, and there are even more of them on the Internet. Let's consider one of them.

Margin is the difference between the final price of a product and its cost.

It is expressed as a percentage of the total price at which the item was sold or the difference in profit per unit of item. First of all, margin is an indicator of profitability.

This term is used not only in trade, but also in stock exchange, banking and insurance practice.

In general usage, the word margin refers to the difference between indicators.

In order to obtain data on the financial activity of an enterprise, the following concepts are calculated:

Marginal income is a type of profit that shows the difference between revenue and variable costs. Needed to draw conclusions about the share of variable costs in revenue.

Gross Margin is the ratio of revenue to fixed or variable costs. It is used to analyze the profit taking into account the cost price.

The concept of gross margin differs in Russia and Europe, due to the peculiarities of the financial systems. In Russia, this is the profit received by the company in the course of product sales, as well as variable costs for the purchase of raw materials, production, storage and delivery of goods. Calculated using the following formula:

Gross Margin \u003d Income from product sales - Costs for production, storage, etc.

To obtain information about the current financial condition of the organization, this indicator is calculated.

In Europe, the gross margin or gross margin is the percentage of all company profits from product sales, after all mandatory cash costs have been paid.

Interest margin is the ratio of total and variable costs to revenue.

The margin is usually calculated at the end of the reporting period - month or quarter. Companies that are confidently holding on to the market settle once at the end of the year.

The profitability of a product is reflected by such an indicator as the margin. It is calculated to determine the magnitude of the increase in sales and for the most effective price management.

Photos from the site: iufis.isuct.ru

Extra charge

Let's move on to determining the margin. It is used to name several quantities:

The amount added to the original cost of the product when it is sold.
Retailer's profit.
The difference between retail and wholesale value of products.

The margin can be specified in the contract if the supplier (manufacturer) accepts additional conditions of the intermediary (buyer).

Installed to cover the costs of production, storage and delivery of products.

Its value is set by the final seller, starting from the current state of the market, the presence of competitors and the height of demand for the products sold.

It is important to consider the competitive advantages of both the product in the market and the selling organization.

To determine the correct markup, carefully calculate what costs your company incurs. Consider everything: the cost of raw materials, production, storage, delivery of goods, wages of employees.

Depending on the volume of sales, the margin may vary: for large volumes, the final price is low, for small volumes, it is high. To obtain the greatest profit, it is necessary to determine the added value for products that helps to maintain a balance between sales and prices of goods.

Correctly set value added covers the funds spent on a unit of goods and generates a profit in excess of these costs. This factor makes it clear how much profit is received from the invested funds.

Remember that the current legislation of the Russian Federation for most products does not limit the maximum amount of added value, and allows the company to determine this indicator itself.

These are food products for children, medical devices, medicines, catering products in schools, secondary schools and universities, goods that are sold in the regions of the Far North.

The difference between margin and markup: calculating indicators

Photo from the site: ckovok.com

Margin \u003d (Final cost of goods - Cost of goods) / Final cost of goods * 100%

Margin \u003d (Final cost of goods - Cost of goods) / Cost of goods * 100%

Let's look at an illustrative example:

The cost of the product is 50.
The final price of the item is 80.

We get:

Margin \u003d (80 - 50) / 80 * 100% \u003d 37.5%
Margin \u003d (80 - 50) / 50 * 100% \u003d 60%

It follows from the calculations that the margin is the total profit of the company, after deducting all necessary costs, and the margin is the added value to the cost price.

If at least one of these factors is known, then the second can be calculated:

Margin \u003d Margin / (100 - Margin) * 100%
Margin \u003d Markup / (100 + Markup) * 100%

Let's take a margin equal to 25 as a condition, and a margin of 20, it turns out:

Margin \u003d 20 / (100 - 20) * 100% \u003d 25
Margin \u003d 25 / (100 + 25) * 100% \u003d 20

Photo from the site: pilotbiz.ru

Difference between margin and mark-up

The margin cannot be 100%, but the added value can.

Margin is an indicator of income after covering the required costs. Markup is the added price of a product.

The calculation of the margin depends on the total profit of the company, and the mark-up depends on the original cost of the product.

The higher the markup, the higher the margin, but the second factor is always lower than the first.

Finally

The financial activity of an enterprise is the most important element of its existence.

It is necessary to carry out all the calculations that will help you find weaknesses in the budget and get on the right path in pricing.

It is important to know what margin and markup are and how they differ from each other. These indicators are an effective tool for analyzing the financial condition of an enterprise.

Now you know, if your competitors say: “Our company works with a margin of 150%,” then they do not distinguish between mark-up and margin. Therefore, you already have one advantage over them.

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Source: http://lady-investicii.ru/articles/biznes/otlichiya-marzhi-ot-naczenki.html

What is margin and how to calculate it? A detailed overview of the concept for beginners + calculation formulas

To a procurement participant

Hello dear colleague! Today's article will focus on such a well-known economic term as margin.

Many aspiring entrepreneurs, as well as procurement participants, have no idea what it is and how it is calculated.

This term, depending on the area in which it is used, has different meanings.

Therefore, in this article we will consider the most common types of margin and dwell in detail on the margin in trading. it is she who is of greatest interest to suppliers participating in government and commercial tenders.

1. What is margin in simple terms?

The term "margin" is most commonly found in areas such as trading, stock trading, insurance and banking. Depending on the field of activity in which this term is used, it can have its own specifics.

In this case, it is a relative value, which is expressed in% and is determined by the following formula:

M \u003d P / D * 100%,

P - profit, which is determined by the formula:

P \u003d selling price - cost price

D - income (selling price).

In industry, the margin rate is 20% , and in trade - 30% .

However, I would like to note that the margin in our and Western understanding is very different. For European colleagues, it is the ratio of the profit from the sale of a product to its selling price. For us, for the calculation, net profit is used, namely (selling price - cost price).

2. Types of margin

In this section of the article, we will consider the most common types of margin. So let's get started ...

2.1 Gross (gross) margin

Gross margin (English gross margin) is the percentage of the company's total revenue that it retains after incurred direct costs associated with the production of its goods and services.

Gross Margin is calculated using the following formula:

VM \u003d (VP / OP) * 100%,

VP - gross profit, which is defined as:

VP \u003d OP - SS

OP - sales volume (revenue);
CC is the cost of goods sold;

Thus, the higher a company's BM value, the more funds the company saves for each ruble of sales to service its other expenses and obligations.

The ratio of VM to the amount of proceeds from the sale of goods is called the gross margin ratio.

2.2 Profit margin

There is another concept that is similar to gross margin. This concept - profit margin... This indicator determines the profitability of sales, i.e. the share of profit in the total volume of the company's revenue.

2.3 Variation margin

This term is used in exchange activities. In general, there are a lot of calculators for stock traders to calculate the margin. You can easily find them on the Internet for this search query.

2.4 Net Interest Margin (Bank Interest Margin)

The formula for calculating the NIM is as follows:

NPM \u003d (DP - RP) / BP,

DP - interest (commission) income; RP - interest (commission) expenses;

AD - income-generating assets.

2.5 Guarantee margin

Guarantee margin is the difference between the value of the collateral and the amount of the loan issued.

2.6 Credit margin

Credit margin - the difference between the assessed value of the goods and the size of the credit (loan) issued by the financial institution for the purchase of this product.

2.7 Bank margin

Bank margin (bank margin) is the difference between the rates of loan and deposit interest, loan rates for individual borrowers, or interest rates for active and passive operations.

The BM indicator is influenced by the terms of loans issued, the storage periods of deposits (deposits), as well as the interest on these loans or deposits.

2.8 Front and back margin

These two terms should be considered together because they are related,

Front margin Is the profit from the margin, and back marginIs the profit received by the company from discounts, promotions and bonuses.

3. Margin and Profit: What's the Difference?

Some experts are inclined to believe that margin and profit are equivalent concepts. However, in practice, these concepts differ from each other.

Margin is the difference between indicators, and profit is the final financial result. The profit calculation formula is shown below:

Profit \u003d V - SP - KI - UZ - PU + PP - VR + VD - PR + PD

B - revenue; SP - production cost; KI - commercial costs; UZ - management costs; ПУ - interest paid; PP - interest received; BP - unrealized expenses; VD - unrealized income; ПР - other expenses;

PD - other income.

After that, income tax is charged on the resulting value. And after deducting this tax, it turns out - net profit.

Summing up all of the above, we can say that when calculating the margin, only one type of costs is taken into account - variable costs that are included in the cost of production. And when calculating profit, all expenses and incomes that the company incurs in the production of its products (or the provision of services) are taken into account.

4. What is the difference between the margin and the mark-up?

Let's try to determine the difference with a specific example.

Suppose you purchased an item for 1,000 rubles and sold it for 1,500 rubles. Those. the amount of the margin in our case was:

H \u003d (1500-1000) / 1000 * 100% \u003d 50%

Now let's define the margin size:

M \u003d (1500-1000) / 1500 * 100% \u003d 33.3%

For clarity, the relationship between margin and margin indicators is shown in the table below:

In order to better understand the difference between these two concepts, I suggest you watch a short video:

5. Conclusion

As you can already understand, margin is an analytical tool for assessing the performance of a company (with the exception of stock trading).

And before increasing production, introducing a new product or service to the market, it is necessary to estimate the initial value of the margin.

If you increase the selling price of a product, and the size of the margin does not increase, then this only indicates that the amount of costs for its production is also growing. And with such dynamics, there is a risk of being at a loss.

On this, perhaps, everything. Hopefully you now have the necessary understanding of what margin is and how it is calculated.

Source: http://zakupkihelp.ru/uchastniku-zakupok/chto-takoe-marzha.html

What is margin

Many people come across the concept of "margin", but often do not fully understand what it means. We will try to rectify the situation and give an answer to the question of what is a margin in simple words, as well as analyze what types there are and how to calculate it.

Margin concept

Margin (eng. Margin - difference, advantage) is an absolute indicator that reflects how the business operates.

Sometimes you can still find another name - gross profit. Its generalized concept shows what is the difference between any two indicators.

For example, economic or financial.

Important! If you are in doubt how to write - walrus or margin, then know that from the point of view of grammar you need to write through the letter "a".

This word is used in various fields. It is necessary to distinguish what is a margin in trade, on stock exchanges, in insurance companies and banking institutions.

This term is used in many areas of human activity - there are a large number of its varieties. Let's consider the most widely used ones.

Gross (Gross Profit Margin)

Gross or Gross Margin is the percentage of total revenue remaining after variable costs.

Such costs can be the purchase of raw materials and materials for production, payment of wages to employees, spending on the sale of goods, etc.

It characterizes the general work of the enterprise, determines its net profit, and is also used to calculate other values.

Operating profit margin

Operating margin is the ratio of an entity's operating profit to its income. It indicates the amount of revenue as a percentage that remains with the company after taking into account the cost of goods, as well as other related costs.

Important! High performance indicates good performance of the company. But it is worth being on the alert, because these numbers can be manipulated.

Net (Net Profit Margin)

Net margin is the ratio of the company's net profit to its revenue. It displays how many monetary units of profit the company receives from one monetary unit of revenue. After calculating it, it becomes clear how successfully the company is coping with its expenses.

It should be noted that the value of the final indicator is influenced by the direction of the enterprise. For example, retail firms tend to have relatively small numbers, while large manufacturing firms have fairly high numbers.

Percentage

The interest margin is one of the important indicators of the bank's activity, it characterizes the ratio of its income and expenditure parts. It is used to determine the profitability of loan transactions and whether the bank can cover its costs.

This variety is absolute and relative. Its value can be influenced by the rate of inflation, various active operations, the relationship between the bank's capital and resources that are attracted from outside, etc.

Variation

Variation margin (VM) is a value that indicates the potential profit or loss on trading floors. It is also the number by which the amount of funds taken on bail during a trade transaction can increase or decrease.

If the trader correctly predicted the market movement, then this value will be positive. In the opposite situation, it will be negative.

When the session ends, the incoming VM is added to the account, or vice versa - it is canceled.

If a trader holds his position only for one session, then the results of the trade will be the same with the VM.

And if a trader holds his position for a long time, it will be added on a daily basis, and ultimately its indicators will not be the same as the total of the transaction.

Watch a video on what margin is:

Margin and profit: what's the difference

Most people tend to think that the concepts of "margin" and "profit" are identical, and cannot understand what is the difference between them. However, albeit insignificant, there is still a difference, and it is important to understand it, especially for people who use these concepts on a daily basis.

Recall that margin is the difference between a firm's revenue and the cost of the goods it produces. To calculate it, only variable costs are taken into account, excluding the rest.

Profit is the result of the financial activity of the company based on the results of a certain period. That is, these are the funds that remain with the enterprise after taking into account all the costs of the production and sale of goods.

In other words, the margin can be calculated as follows: subtract the cost of the item from the revenue. And when profit is calculated, in addition to the cost of goods, various costs, costs of running a business, interest that are paid or received, and other types of expenses are taken into account.

By the way, such words as “back margin” (profit from discounts, bonus and promotional offers) and “front margin” (profit from a markup) are associated with profit.

What is the difference between margin and markup

To understand how the margin differs from the markup, you must first clarify these concepts. If everything is already clear with the first word, then with the second it is not quite.

The markup is the difference between the cost price and the final price of the product. In theory, it should cover all costs: production, delivery, storage and sale.

Therefore, it is clear that the markup is a markup to the cost of production, and the margin just does not take this cost into account during the calculation.

Different difference. When the margin is calculated, the difference between the cost of goods and the purchase price is taken, and when the margin is calculated, the difference between the company's revenue after sale and the cost of goods.
Maximum volume. The margin has almost no restrictions, and it can be at least 100, at least 300 percent, but the margin cannot reach such figures.
Calculation basis. When calculating the margin, then the company's income is taken as the base, and when calculating the margin, the cost price is taken.
Conformity. Both quantities are always directly proportional to each other. The only thing is that the second indicator cannot exceed the first.

Margin and margin are quite common terms used not only by specialists, but also by ordinary people in everyday life, and now you know what their main differences are.

Margin calculation formula

Gross margin reflects the difference between revenue and total costs. The indicator is necessary for analyzing profit taking into account the cost price and is calculated using the formula:

GP \u003d TR - TC

Similarly, the difference between revenue and variable costs will be called Marginal income and is calculated by the formula:

CM \u003d TR - VC

Gross margin ratioequal to the ratio of gross margin to the amount of sales revenue:

KVM \u003d GP / TR

Similarly Margin income ratio is equal to the ratio of marginal income to the amount of sales revenue:

KMD \u003d CM / TR

It is also called the margin rate. For industrial enterprises, the margin rate is 20%, for commercial enterprises - 30%.

Interest margin shows the ratio of total costs to revenue (income).

GP \u003d TC / TR

or variable costs to revenue:

CM \u003d VC / TR

Margin in various areas

As we already mentioned, the concept of "margin" is used in many areas, and perhaps that is why it can be difficult for an outsider to understand what it is. Let's see in more detail where it is used and what definitions are given.

In economics

Economists define it as the difference between the price of a product and its cost. That is, in fact, this is its main definition.

Important! In Europe, economists explain this concept as the percentage rate of the ratio of profit to sales of products at the selling price and use it in order to understand whether the company is efficient.

In general, when analyzing the results of work, companies most of all use the gross variety, because it is it that has an impact on the net profit, which is used for the further development of the enterprise by increasing the fixed capital.

In the banking sector

In banking documents, you can find such a term as credit margin. When a loan agreement is concluded, the amount of goods under this agreement and the amount paid in fact to the borrower may be different. This difference is called credit.

During the registration of a loan against collateral, there is a concept called the guarantee margin - the difference between the value of the property issued on collateral and the amount of funds issued.

Almost all banks lend and accept deposits. And in order for the bank to profit from this type of activity, different interest rates are set. The difference between the value of the interest rate on loans and deposits is called the bank margin.

In exchange activities

On exchanges, they use a variation variety. It is used most often on futures trading platforms.

From the name it is clear that it is changeable and cannot have the same meaning.

It can be positive if the trades brought profit, or negative if the trades were unprofitable.

Thus, we can conclude that the term "margin" is not so complicated. Now you can easily calculate its various types by the formula, the marginal profit, its coefficient and, most importantly, you have an idea in which areas this word is used and for what purpose.

Default. What are its consequences for the economy and people of our country?

Let's consider in a separate article.

Who are the beneficiaries or true owners of the business?

Source: http://svoedelo-kak.ru/finansy/marzha.html

Margin is the difference between ... Economic terms. How to calculate the margin

Economic terms are often ambiguous and confusing.

The meaning laid down in them is intuitively clear, but rarely anyone succeeds in explaining it in public words, without prior preparation. But there are exceptions to this rule.

It happens that a term is familiar, and with an in-depth study of it, it becomes clear that absolutely all of its meanings are known only to a narrow circle of professionals.

Everyone has heard, but few people know

Let's take the term "margin" for example. The word is simple and, one might say, commonplace. Very often it is present in the speech of people far from the economy or stock trading.

Most people think that margin is the difference between any similar metrics. In daily communication, the word is used in the discussion of trading profit.

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

However, a modern person needs to understand all the senses of this term, so that at an unexpected moment for himself “not to lose face”.

Economic margin

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 conversion of income into profit.

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

Margin \u003d Profit / Income * 100.

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

Gross margin

In the analysis of the profitability of the enterprise, the main indicator of the result of the performed activities is the gross margin. The formula for its calculation is the difference between the proceeds from the sale of products in the reporting period and the variable costs of producing these products.

Only the level of gross margin 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.

The gross margin is created by the labor of the employees of the enterprise spent on the production of products or the 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 the implementation of the economic activity of the enterprise.

These include the write-off of receivables and payables, the provision of non-industrial services, income from housing and communal services, etc.

It is extremely important for the analyst to correctly calculate the gross margin, since this indicator forms the company's net profit, and in the future, development funds.

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 the total revenue.

Banks and margin

The bank's profit and its sources demonstrate a number of indicators. To analyze the work of such institutions, it is customary to calculate as many as four different margin options:

The credit margin is directly related to the work under credit agreements, it is determined as the difference between the amount indicated 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 a key indicator of banking performance. The formula for its calculation looks like the ratio of the difference in commission income and expenses for all transactions to all bank assets. The net margin can be calculated on the basis of all the assets of the bank, and only from those involved in the work at the moment.
The margin is the difference between the appraised value of the collateral and the amount issued to the borrower.

So different meanings

Of course, the economy does not like discrepancies, but in the case of understanding the meaning of the term "margin" this happens. Of course, on the territory of one and the same state, all analytical reports are fully 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 the 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 a relative assessment of the effectiveness of the company's trading activities.

It should be noted that the European attitude to the calculation of margin is fully consistent with the foundations of economic theory, which was written above.

In Russia, this term is understood as net profit. That is, making calculations, they simply replace one term with another.

For the most part, for our compatriots, the margin is the difference between the proceeds from the sale of goods and the overhead costs for its production (acquisition), delivery, and sale. It is expressed in rubles or another convenient currency for payments.

It can be added that the attitude to margin among professionals is not much different from the principle of using the term in everyday life.

How is the margin different from the 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.

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

A good example will help dispel any doubts that have arisen.

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 \u003d 0.5. The calculation showed that the margin is 50% of the cost of the goods. In the case of the margin, the calculations will look like this: (150-100) / 150 \u003d 0.33. The calculation showed a margin of 33.3%.

Correct analysis of indicators

It is very important for a professional analyst not only to be able to calculate the indicator, but also to give a competent interpretation of it. This is a difficult job that requires
great experience.

Why is this so important?

Financial indicators are rather arbitrary.

They are influenced by valuation methods, accounting principles, the conditions in which the company operates, changes in the purchasing power of the currency, etc.

Therefore, the calculated result obtained cannot be immediately interpreted as “bad” or “good”. Additional analysis should always be performed.

Equity Margin

Exchange margin is a very specific metric.

In the professional slang of brokers and traders, it does not mean profit at all, as it was in all the cases described above.

The margin in the stock markets becomes a kind of collateral when making transactions, and the very service of such trades is called “margin trading”.

The principle of margin trading is as follows: when concluding a deal, the investor does not pay the entire amount of the contract in full, he uses the borrowed funds of his broker, and only a small deposit is debited from his own account. If the result of the transaction 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 using the borrowed funds of the broker. The client can also sell borrowed securities. In this case, the debt will have to be repaid with the same securities, but they are purchased a little later.

Each broker gives its investors the right to make margin transactions on their own. At any time, he can refuse to provide such a service.

Benefits of margin trading

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

The ability to trade on financial markets without having large enough amounts on the account. This makes margin trading a highly profitable business. However, when participating in operations, one should not forget that the level of risk is also not small.
The opportunity to receive additional income when the market value of shares decreases (in cases where a client borrows securities from a broker).
To trade in different currencies, it is not necessary to have funds in these currencies on your deposit.

Management of risks

To minimize the risk when concluding margin transactions, the broker assigns each investor the amount of collateral and the level of margin.

In each case, the calculation is made individually.

For example, if a negative balance appears on the investor's account after a trade, the margin level is determined using the following formula:

UrM \u003d (DK + CA-ZI) / (DK + CA), where:

DC - the investor's funds deposited;

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

ZI - an investor's debt to a loan broker.

Tracking is possible only if the margin level is at least 50%, and if otherwise is not provided for in the agreement with the client. According to general rules, a broker cannot enter into transactions that will lead to a decrease in the margin level below the established limit.

In addition to this requirement, a number of conditions are put forward for conducting margin transactions in the stock markets, designed to streamline and secure the relationship between the broker and the investor. The maximum amount of loss, debt repayment terms, conditions for changing the contract and much more are discussed.

It is rather difficult to understand all the variety of the term “margin” in a short time. Unfortunately, in one article it is impossible to tell about all areas of its application. In the above reasoning, only the key points of its use are indicated.

Companies that engage in trading activities exist at the expense of a margin. A certain amount in rubles is added to the cost of goods or services, and as a result, the selling price of the goods is obtained. But then the question arises, what is the margin and does it equal the margin? Many aspiring entrepreneurs often confuse the two. Let's figure it out ...

I am not an economist and myself used to confuse these concepts. When I was hired to work in sales in a large company, my future manager asked me if there could be more margin and I fell into a stupor at first, as I thought it was the same thing. He asked me if the price of the product is 130 rubles, and the cost price is 100, then how much will the margin and markup be. I said I was 30 and was not mistaken. Then he asked me, and how much in percentage, and then I swam 🙂 30%, I answered, margin and extra charge, a little embarrassed and already realizing that I didn't know something. 30% and 23% he answered. After that, I began to tighten up my economic knowledge, since it is required for active growth in the field of sales and management, negotiation skills alone will not be enough here, I realized.

Margin - (from the English margin - difference, advantage) is the difference between the selling price of a product and its cost (purchase price + delivery costs). It is also called gross profit. In other words, an indicator of the return on sales. This difference can be expressed both in rubles and as a percentage.

We figured out the margin, but what is the margin? Extra charge (in English markup) is the difference between the cost of goods and the selling price, an addition to the price of the goods being sold. I myself am a visual and I love a visual explanation of why I made the following picture.

Once again, point by point:

When they count the estimate, they take the difference between the cost of goods and the price of sale, and when they calculate the margins - the difference between the manufacturer's company after the sale of the goods and its cost.
The maximum volume at the mark has no restrictions, and it can be at least 100%, at least 500% in relation to the cost of goods. For example, the cost of goods is 100 rubles, but they decided to make a markup of 250 rubles. In this case, the markup will be 250%.
The margin cannot be more than 100%, as this will exceed the selling price of the product. The largest margin of 99.99%. If you have one, call me urgently and tell me what you do 🙂
Margin and mark-up are directly proportional to each other. The only thing is that the margin cannot exceed the mark-up.
These calculations apply to both goods and services.

Before setting a margin, proceed from the competitiveness of both the product itself and the company in the market. It is important not to forget about the development of your company relative to competitors, because some of them sell similar goods at a low price, but in large volumes, and vice versa - at a high price, but in small volumes.

Of course, ideally, the trade margin should allow you to keep a balance between the optimal price and the expected sales volume, but in no case affect the quality of the product or service. If you are for uncalculated dumping, your road leads to collapse, believe me. This is clearly shown by the market of plastic windows in Russia. Hundreds of companies are closed annually, which knew how to trade only with the help of reckless understatement of prices, they did not know other ways to attract a client. Only large window manufacturers and skilful trading companies remain on the window market, which make the correct calculation, attract the buyer with a high level of service, product quality and are able to earn not only on the main product, but also on related ones, for example, on OKFIL window filters, which can be sell with every window and this will increase the overall profitability of the business. If you set the correct trade markup for your services (or goods), then its value will be able to fully cover the costs that the unit of goods brought and, moreover, leave the company a profit.

Map and natsenka are very common terms, now you know their meanings and differences. Use them wisely and reach new levels of collaboration with large companies.

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