Operating margin is operating income divided by revenue, expressed as a percentage under the firm's accounting presentation.
Definition
Operating margin indicates how much reported revenue remains as operating income after the firm records its operating expenses. The calculation is operating income divided by a stated revenue base, with the result expressed as a percentage. Operating expenses may include project delivery costs, staff, occupancy, technology, and administration, according to the firm's accounting classifications. Owners should confirm how pass-through expenses and other revenue are treated, and whether any items are classified outside operations. Firms can report different margins from similar activity because they classify costs and revenue differently. Operating margin is not the same as gross margin, which generally subtracts costs directly tied to delivering services, or EBITDA, which adjusts for interest, taxes, depreciation, and amortization. It also is not cash flow, because it is based on accounting results rather than cash receipts and payments. A consistent definition makes it more useful for reviewing operating performance over time.
How owners use it
- Review operating results as a share of the firm's stated revenue base.
- Compare periods after checking consistent classification of project costs and overhead.
- For example, $150,000 operating income ÷ $1,000,000 revenue = 15% operating margin.
- Read the measure alongside cash flow and gross margin to see different parts of performance.
