Operating profit percentage, also known as operating margin, is a measure of how much profit a business makes from its core operations, after deducting the cost of goods sold and operating expenses. It indicates how efficiently a business manages its costs and generates revenue from its operations. Operating profit percentage is calculated by dividing the operating profit by the total revenue, and multiplying by 100 to get a percentage value. The formula for operating profit percentage is:
How to Calculate Operating Profit Percentage in Excel
To calculate operating profit percentage in Excel, we need to have the following data:
- Total revenue: The total amount of money earned by the business from selling its products or services.
- Cost of goods sold: The total amount of money spent by the business to produce or purchase the products or services that are sold.
- Operating expenses: The total amount of money spent by the business to run its operations, such as rent, salaries, utilities, marketing, etc.
We can use the following steps to calculate operating profit percentage in Excel:
- Enter the data in a worksheet, as shown below. You can use any cell references as per your convenience.
| A | B |
|---|---|
| Total revenue | 100,000 |
| Cost of goods sold | 40,000 |
| Operating expenses | 30,000 |
- Calculate the operating profit by subtracting the cost of goods sold and operating expenses from the total revenue. Enter the following formula in cell B4:
=B1-B2-B3
The result is 30,000.
- Calculate the operating profit percentage by dividing the operating profit by the total revenue, and multiplying by 100. Enter the following formula in cell B5:
=B4/B1*100
The result is 30%.
- Format the result as a percentage by selecting cell B5 and clicking the percentage symbol (%) in the Number group on the Home tab.
The final result is 30%, as shown below.
| A | B |
|---|---|
| Total revenue | 100,000 |
| Cost of goods sold | 40,000 |
| Operating expenses | 30,000 |
| Operating profit | 30,000 |
| Operating profit percentage | 30% |
Example Scenario
To illustrate how to calculate operating profit percentage in Excel, let us consider the following example scenario:
- A bakery sells cakes and pastries for a total revenue of $50,000 in a month.
- The bakery spends $20,000 to buy the ingredients and packaging materials for the cakes and pastries. This is the cost of goods sold.
- The bakery also spends $15,000 to pay the rent, salaries, electricity, and advertising costs. This is the operating expenses.
We can use the same steps as above to calculate the operating profit percentage for the bakery in Excel.
- Enter the data in a worksheet, as shown below.
| A | B |
|---|---|
| Total revenue | 50,000 |
| Cost of goods sold | 20,000 |
| Operating expenses | 15,000 |
- Calculate the operating profit by subtracting the cost of goods sold and operating expenses from the total revenue. Enter the following formula in cell B4:
=B1-B2-B3
The result is 15,000.
- Calculate the operating profit percentage by dividing the operating profit by the total revenue, and multiplying by 100. Enter the following formula in cell B5:
=B4/B1*100
The result is 30%.
- Format the result as a percentage by selecting cell B5 and clicking the percentage symbol (%) in the Number group on the Home tab.
The final result is 30%, as shown below.
| A | B |
|---|---|
| Total revenue | 50,000 |
| Cost of goods sold | 20,000 |
| Operating expenses | 15,000 |
| Operating profit | 15,000 |
| Operating profit percentage | 30% |
Interpretation and Analysis
The operating profit percentage tells us how much of the total revenue is left as profit after paying for the cost of goods sold and operating expenses. A higher operating profit percentage means that the business is more efficient and profitable, and has more control over its costs. A lower operating profit percentage means that the business is less efficient and profitable, and has less control over its costs.
In the example scenario, the bakery has an operating profit percentage of 30%, which means that for every $1 of revenue, the bakery makes $0.30 of profit from its core operations. This is a relatively high operating profit percentage, indicating that the bakery is doing well in managing its costs and generating revenue from its operations.
However, operating profit percentage is not the only indicator of a business’s performance. There are other factors that may affect the profitability and sustainability of a business, such as interest, taxes, depreciation, amortization, and other non-operating income or expenses. Therefore, operating profit percentage should be used in conjunction with other financial ratios and metrics, such as gross profit percentage, net profit percentage, return on assets, return on equity, etc.
Other Approaches
There are other ways to calculate operating profit percentage in Excel, such as using the SUM function, the IF function, or the PivotTable feature. Here are some examples of how to use these approaches:
- Using the SUM function: We can use the SUM function to add up the cost of goods sold and operating expenses, and then subtract the result from the total revenue to get the operating profit. For example, we can enter the following formula in cell B4:
=B1-SUM(B2:B3)
The result is the same as before, 30,000. Then, we can use the same formula as before to calculate the operating profit percentage in cell B5:
=B4/B1*100
The result is the same as before, 30%.
- Using the IF function: We can use the IF function to check if the total revenue is zero or not, and then calculate the operating profit percentage accordingly. For example, we can enter the following formula in cell B5:
=IF(B1=0,0,B4/B1*100)
This formula will return 0 if the total revenue is zero, to avoid a division by zero error. Otherwise, it will return the same result as before, 30%.
- Using the PivotTable feature: We can use the PivotTable feature to create a summary table of the data, and then calculate the operating profit percentage using a calculated field. For example, we can follow these steps:
- Select the data range (A1:B3) and click the Insert tab on the ribbon.
- Click the PivotTable button in the Tables group and choose a location for the PivotTable report.
- Drag the A field to the Rows area, and the B field to the Values area. The PivotTable will show the sum of the B values for each A value, as shown below.
A Sum of B Total revenue 50,000 Cost of goods sold 20,000 Operating expenses 15,000 Grand Total 85,000 - Click the Analyze tab on the ribbon and click the Fields, Items & Sets button in the Calculations group. Then, click the Calculated Field option.
- In the Insert Calculated Field dialog box, enter a name for the calculated field, such as Operating profit percentage. Then, enter the following formula in the Formula box:
=(Total revenue-Cost of goods sold-Operating expenses)/Total revenue*100- Click the Add button and then the OK button. The PivotTable will show the operating profit percentage as a new field, as shown below.
A Sum of B Operating profit percentage Total revenue 50,000 30% Cost of goods sold 20,000 -40% Operating expenses 15,000 -30% Grand Total 85,000 0% Note that the operating profit percentage for the cost of goods sold and operating expenses are negative, because they are subtracted from the total revenue. The operating profit percentage for the grand total is zero, because it is the same as the total revenue.
