In accounting terms, a standard margin is a measure of profitability for a business unaffected by "one-time" events, the random and the unpredictable. Standard margin is used to measure the effectiveness and value of a business from a purely internal perspective, while ignoring potential positive windfalls or negative costs in the business environment.
Standard margin is calculated simply by subtracting standard costs for a certain time period from sales and revenues for that same period.
Standard costs exclude "one-time" costs and only include normal, expected costs. For instance, standard costs would include normal electric bills and rent, but would not include payments on a lawsuit.
The measure of a healthy standard margin varies by industry, and could range from three percent to over 100 percent of sales. The determination of a healthy standard margin is made by the business owner, based on the industry.
Standard margin is valuable for initial business planning (ensuring the model is regularly profitable) and for long-term planning (ensuring that the model is sustainable).
Standard margin can be an unrealistic measurement for gauging the actual effectiveness of a business and taking into account all aspects of operation; no business can avoid unpredictable events, which very often have significant impacts on profitability.
