Operating Margin · CTO CORE

Take revenue, subtract COGS and OPEX, and you have operating income. That's what the business earns from running itself, before interest and taxes. Divide it by revenue and you have operating margin.

\text{Operating Margin} = \frac{\text{Revenue} - \text{COGS} - \text{OPEX}}{\text{Revenue}}

With the calculator's numbers, $1,000,000 of revenue,$ 400,000 of COGS and $300,000 of OPEX leave$ 300,000 of operating income. That's a 30% operating margin. 30¢ of every revenue dollar is left after you deliver the product and run the company.

This is the number your CFO and board use to judge whether the business model works. It leaves out interest and taxes on purpose, because nobody running the business controls those day to day.

Higher is better. Negative means the company spends more running itself than it brings in.

You might also hear about the operating expense ratio. That's OPEX divided by revenue, and lower is better. Here it's 30%. Gross margin minus the operating expense ratio gives you operating margin: 60% - 30% = 30%.