Margins

Well, these are Marge Inns. (Marge Simpson's hair on a billboard, maybe?) But they have nothing to do with what we’re talking about here.

The term margin refers to various definitions of profit. But a margin isn’t a number. It’s a fraction, indicating what it cost a seller to sell something. That is, your profit after selling a 2 dollar whoopie cushion that cost you 50 cents is a buck fitty. So your profit margin was $1.50 over 2 bucks or 75%.

Another: Like, if a store sells a Betsy Cries Herself to Sleep Doll for a dollar and it cost the store 60 cents to buy the thing from the factory, then its gross profit margin on the doll is 40 percent. And you say that the product had gross profits of 40 cents on that unit.

But these figures don’t include the cost of hiring the employee to sell the doll nor the rent, nor the insurance on the building, nor the electric bill to run the lights nor the security guard who stands outside and falls asleep against the building on a nightly basis.

So, on your typical income statement, you’ve got revenues expenses of the actual doll then gross profit, i.e. Gross margin operating profit, i.e. Operating margin, and net profit, i.e. “The bottom line.”

Say a Starbucks sells 10,000 cups of Brain-blaster Bolivian coffee for $7 each, to produce 70 grand of revenue in a month. The coffee itself plus the barista, minimum wages, electricity and other basics, cost them 45 grand in that same month.

Their gross profit then, is 25 grand, and their gross margin is 25 over 70 or about 36%. They then have franchise fees and advertising and legal costs and insurance for the hot spills that burn people in their stores, and that costs them another 10 grand a month.

After that 10 grand, they have 15 grand in operating profits, and their operating margin is 15 over 70 or 21%. Then they pay taxes on that 15 grand of, say, 5 grand, so they have net profits of 10 grand, or net margin of 10 over 70, which is 14-ish%.

Why do we call these things margins? Well, it’s actually a good way to remember what they are.

Margins are so named because, back in the day of paper and pen, people used to write all their income, costs and expenses on a line and then jot down their margin in the actual geographic margin.

Eh, we like the Simpsons explanation better...