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8.7 Operating Profit Margin Analysis

The Operating Profit Margin for a small business like Central Plumbing and Heating is the Operating Income divided by the sales of the business. In the world small business the earnings before income and taxes is used as the operating income. This ratio computes how much money the business has left over to pay for the interest on its loans and taxes and it gives small business owners like Felix & Michael the ability to explain to the reader of the business plan just what kind of cushion the business has to pay its creditors.

In this analysis we can see that the operating margin will be 26.5%, 30% and 32.9% of total sales which are projected to be $286k, $325k and $375 in the years 2015, 2016 and 2017 respectively. What this means in simple English is that of every dollar earned in 2015, 74 cents will towards the payment of interest, taxes and the rest to the firms' bottom line. These margins of course can be easily affected if costs were to increase resulting in higher operating expenses andtherefore lower the operating margin. Alternatively sales could come in higher than projected and that could improve these ratios if costs remainedthe same. Operating income is currently projected to be $75,833, $97,612 and $123,423 in 2015, 2016 & 2017 respectively.

Quick Links:

  1. Go to the Corresponding Template section for this industry.
  2. Go to the Corresponding Questionnaire section for this industry.

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