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.
How is Standard Margin Calculated?
Standard margin is calculated simply by subtracting standard costs for a certain time period from sales and revenues for that same period.
What are Standard Costs?
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.
What's a Good Standard Margin?
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.
When is Knowing the Standard Margin Valuable?
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).
When is Knowing the Standard Margin Not Valuable?
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.