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Operating Margin measures the profitability of your core business activities, excluding the effects of interest and taxes.
This metric is important for assessing fiscal health and scalability potential. It's an indicator of operational efficiency and highlights how well you manage your costs relative to its revenue. Operating Margin is useful during funding rounds, as a healthy Operating Margin demonstrates you can meet operating costs while scaling up. It can also inform pricing adjustments, cost control measures, and benchmarking against competitors.
Operating Income / Revenue x 100
To calculate Operating Margin, divide your Operating Income by your Revenue, then multiply the result by 100.
Operating Margin can be improved by growing revenue, optimising variable costs, reducing overheads, and focusing on high-margin products. It's also good practice to benchmark against similar industry averages.
A high Operating Margin doesn't always signal healthy finances. If achieved through excessive cost-cutting, it might hinder growth potential and sustainability. Also, Operating Margin should not be confused with a cash metric, as it doesn't account for capital expenditure or working capital.
