Sales are the lifeblood of small business, but only if each sale is profitable. That is, your business can have superior sales, but it doesn't matter if you're not making a profit on those sales. Top-line margin is a measure of sales growth that allows for an objective measure of profitability. There are two primary top-line margin calculations, gross margin and operating margin.

## Gross Profit Margin

Gross profit is often used to determine the viability of a firm's business model. The business model is what defines the business; it's what makes the business unique. Two companies selling the same product may have different gross profit margins because one business has found a more efficient way of delivering the good or service. Gross profit margin does not take the cost of operating into consideration -- only the cost of the goods used to make the sale, such as labor and inventory, are included.

## Gross Profit Margin Example

Gross profit is calculated by subtracting the cost of goods sold from sales. Margin is calculated by dividing gross profit by total sales. For example, if your business made \$10,000, and the cost of goods sold is \$4,000, the gross profit is \$6,000, and gross profit margin is 60 percent. The higher the gross margin, the more sales per dollar the company gets to keep. Sixty percent gross margins means the business is keeping \$0.60 of every \$1 sold.

## Operating Margin

While gross profit is the first level of top-line performance, operating margin is second, and it provides additional insight into the efficiency of management to operate the business. Gross margin focuses on the business model or business idea, while operating margin focuses on the efficiency and effectiveness of management. Operating income, also referred to earnings before interest and taxes, includes other costs of operations. These are shared costs that cannot be directly tied to the sale of one unit.

## Operating Margin Examples

Operating margin, also referred to as return on sales, is calculated by dividing operating income by total sales. For example, if your business incurred \$2,000 in operating expenses, the operating margin is calculated by subtracting \$2,000 from gross profit, which is \$6,000, and then dividing by total sales, or \$10,000. The answer is 40 percent. An operating profit margin of 40 percent means that \$0.40 is made on each dollar of sales after accounting for the cost of goods sold and operating expenses.