What Is the Difference Between Profits Before Tax and Operating Margins?

by Deborah Barlowe, studioD

An income statement reveals a company’s financial performance during a defined period. In between its display of a business’ net profit or loss and the company’s gross profit, an income statement presents the business’ operating income, also known as earnings before interest and taxes, as a dollar figure. A company’s operating margin, on the other hand, expresses the business’ operating income as a percentage of the company’s total sales during the given period.

Cost of Goods Sold and Operating Expenses

An income statement subtracts certain types of expenses from a company’s sales revenue in a prescribed sequence to reveal different levels of profit or loss, including a business’ gross profit and operating income. Cost of goods sold is the total of expenses incurred by a business to produce its saleable goods and services during a period. An income statement itemizes the operating expenses a business pays to maintain its presence in the marketplace and to support its actual production of goods and services. In other words, a company’s cost of goods sold equals all expenses paid that directly relate to production. Operating expenses, meanwhile, reflect costs necessary for a business to continue its overall operations. A company’s cost of goods sold includes production materials and packaging supplies. Comparatively, a business’s operating expenses include the costs of insurance, utilities, wages and advertising.

Gross Profit

An income statement uses a company’s gross profit to determine its operating income. An income statement reveals a company’s gross profit near the top of the statement. An income statement shows that a company’s gross profit equals its sales revenue minus the cost of goods sold. If a business records $100,000 in sales revenue and a cost of goods sold of $50,000, the company’s gross profit equals $50,000, for example.

Operating Income

After itemizing operating expenses below a company’s gross profit, an income statement displays its operating income. An income statement demonstrates that a company’s operating income equals its gross profit minus the sum of its operating expenses. If a company’s gross profit equals $50,000 and the total of the company’s operating expenses equals $25,000, the company’s operating income is $25,000, or $50,000 minus $25,000.

Operating Margin

A company’s operating margin reveals how much of every dollar the business collects as sales revenue it is able to retain after paying for the company’s cost of goods sold and operating expenses. A company’s operating margin equals the business’s operating income divided by the company’s sales revenue. If a company’s operating income is $25,000 and its sales revenue is $100,000, the business’s operating margin is 25 percent, or $25,000 divided by $100,000.

About the Author

Deborah Barlowe began writing professionally in 2010. With experience in earning securities and insurance licenses and having owned a successful business, her articles have focused predominantly on finance and entrepreneurship. Barlowe holds a bachelor’s degree in hotel administration from Cornell University.

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