What is a good operating margin?

A good operating margin usually sits between 10% and 20%, but that varies a lot by sector. What counts as a good margin for your business only becomes clear once you set it against similar businesses. Businesses with high fixed costs simply run on lower percentages than businesses that mainly sell hours. After that it's a matter of keeping your costs in hand and getting your prices right. A healthy operating margin gives you calm in your figures and room to grow.

What exactly does operating margin mean?

The operating margin shows how much you keep from every euro of revenue, after deducting all the costs of running your business. It's about the profit from your own work, before you pay interest and tax.

That differs from the other margins because it only looks at how you run the business. Gross margin only looks at your purchasing, net margin also counts interest and tax. The operating margin says the most about how your business really runs.

For business owners, that figure matters because it tells you whether your way of working earns money. A low operating margin means you have little room for a setback or an investment, and you feel a bad month straight away in your bank balance. A higher margin gives you air.

You can also look at your operating margin per dish, per service or per job. Then you see which parts of your business are worth the work and where you need to improve something. In a catering business there's often a surprise in that: the biggest job is far from always the best one. (source: Wikipedia)

How do you work out your business's operating margin?

The formula for operating margin is simple: (Operating profit ÷ Revenue) × 100%. You take those figures from your profit and loss account.

You get your operating profit by reducing your revenue by all the costs you incur to run the business. Think staff, rent, purchasing, transport and marketing. You don't count interest and tax.

An example: your business has revenue of €100,000 and operating costs of €85,000. Your operating profit is then €15,000. Your operating margin becomes: (€15,000 ÷ €100,000) × 100% = 15%.

You can do that calculation every month or every quarter, and that's exactly what you should do. Then you see the trend and can adjust when your margin slips. Many businesses only do this once the year is over, with the accountant. Then you hear in May what went wrong in September, and by then it's too late to do anything about it. (source: Wikipedia)

What operating margin percentage is healthy for businesses?

A healthy operating margin sits between 5% and 25%, depending on your sector. For most businesses, 10% to 20% is a good outcome.

What's healthy depends directly on your cost picture. Businesses with high fixed costs, like restaurants or shops, often achieve lower margins than a consultancy or a software company. The stage your business is at matters too: anyone who's just starting out and investing heavily can run on lower figures for a few years without anything being wrong.

Set your own margin against direct competitors. Look at businesses of a similar size in the same market. Trade associations sometimes publish averages you can use as a comparison.

More important than the average is the trend in your own figures. A margin that's slowly slipping is a warning, even if the percentage still looks fine. The other way round, a rising margin means your business is running better and better. (source: Zenchef)

Why does a good operating margin differ by sector?

Every sector has a different cost structure, and that feeds straight through into the operating margin. In a sector with high fixed costs or a lot of competition, margins are simply lower. That's not a sign those businesses are doing worse.

In retail, margins are often low, around 2% to 5%, because competition is fierce and fixed costs are high. Supermarkets run on very thin margins with high revenue. Software companies can reach 20% to 40%, because an extra customer costs them almost nothing extra.

Your way of working also makes a difference. Businesses that run on people, like catering, have higher costs than a sector where a machine does the work. A caterer who does a wedding with a team of fifteen has a very different cost picture from a caterer who mainly delivers sandwiches. Specialising helps: businesses that offer something no one else can can charge a higher price.

The market plays a part too. In a growing market you get your prices through more easily, while in a shrinking market everyone starts competing on price and your margins drift towards the lower end of your sector. (source: Rabobank)

How can you improve your operating margin?

The best way to raise your operating margin is keeping your costs in hand better and losing less time to work that earns nothing. Start with your biggest cost items, since that's where you can improve the most.

You can save in several ways. Go back to your suppliers, cut the retyping out of your admin, or look at your energy bill. Many businesses find that putting their quotes and invoices on the computer saves them straight away, in hours as well as in mistakes.

Consultants call that efficiency. In a catering kitchen it simply means: less driving back and forth, throwing away fewer leftovers, and spending fewer hours on a job that earns little.

Your prices are the second dial you can turn. Check whether your prices still fit the market and whether you're offering something customers are happy to pay for. Sometimes you can improve your margin by changing what you offer and doing more of the work with good margins. For catering businesses, a quotes system to work out prices more precisely, so your margin is already in the quote instead of only showing up afterwards.

Also invest in your people and in your way of working. Someone who's well trained works faster and makes fewer mistakes, and a consistent way of working prevents waste. In catering, efficiency is rarely about the kitchen itself, by the way: it sits in the hours on the phone, in rechecking quotes, and in tracking down what you agreed last time. Tackle that structurally, not as a one-month push. (source: The Fork Manager)

What are the main benefits of a good operating margin?

A strong operating margin gives your business a solid footing and room to grow. You have a buffer when something goes wrong, and you can say yes straight away to an opportunity that comes along.

A good margin makes it easier to invest in a new refrigerated van, in software or in extra people. Those are exactly the things that make your business earn more a year from now. That gives you an edge over businesses that are tight every month. You also absorb a bad year better.

A healthy operating margin also makes your business more attractive to a bank, or to someone who wants to buy it. It shows you're running a business that earns money, not just turns over revenue. That matters if you ever want to expand, and just as much if you ever want to sell up.

Finally, a good margin gives you room to manoeuvre on price. You can occasionally quote sharply on a job you really want, without that costing you the whole month straight away.

What you can do about your operating margin this month

List your last twenty jobs and work out per job what was left after all costs. Count the hours you put into preparation yourself too, since those aren't free. Often you'll see straight away which type of job structurally disappoints.

Then look at your three biggest cost items from last year. For most catering businesses that's staff, purchasing and transport. One percent on your purchasing is already €4,000 a year on €400,000 revenue, and that's often just one conversation with your supplier.

If you'd rather see how someone else tackled it, read how Catering en Slagerij Hemelsoet got its work in better order.

Frequently asked questions

How often should I check my operating margin?

Work out your operating margin every month. Then you see a trend and can step in before it becomes a problem. If you do seasonal work, check more often in your busy weeks, say weekly, since that's where your figures for the whole year get made.

What should I do if my operating margin suddenly drops?

First find out which costs have gone up or which revenue has dropped away. Look at your biggest items: staff, purchasing and rent. Set the figures against previous periods, and the difference jumps out. Then tackle the cause, for instance by talking to your supplier again or adjusting your prices.

Can I compare my operating margin with businesses outside my sector?

That's not much use, since costs sit differently in every sector. Compare with businesses in your own sector, ideally of a similar size. Trade associations and accountancy firms publish figures that sit closer to your situation.

Which costs do I leave out when working out operating margin?

Leave interest, tax, depreciation and one-off costs out of your calculation. Spending that has nothing to do with your day-to-day work, such as renovating your premises or a court case, doesn't belong in it either. Only include the costs you incur to keep your business running.

Is a higher operating margin always better for my business?

Not always. A very high margin can mean you're investing too little in your people, your equipment or your name. It's about the balance between what you keep and what you put back into your business. A margin that leaves room to keep investing is what you want.

How can automation improve my operating margin and efficiency?

Automation saves hours and mistakes. Think of invoices generated straight from the job, stock that tracks your orders, and quotes you don't have to retype. You usually earn the investment back quickly, because you pay for fewer admin hours and lose less revenue to forgotten extra work.

What are the biggest pitfalls when improving operating margins?

Cutting costs too hard comes at the expense of your quality, and customers notice that faster than you'd think. Raising prices without offering anything extra in return doesn't work either. Look for things that keep working: sharper buying, a consistent way of working and fewer hours on admin. Cutting the wrong corner costs you more in the long run than it saves.

Catermonkey works out your jobs from your recipes and your hours, so you see the margin per job instead of only at the year-end figures.

Try it for free