What is operating margin?
Operating margin is operating income divided by revenue: the share of each revenue dollar left after operating costs, before interest and taxes. Operating income is revenue minus the cost of delivering the work and all operating expenses, such as sales, marketing, administration and branch overhead. It is also called return on sales.
Why it matters to a revenue leader
Operating margin is where the cost of the sales team shows up. A revenue leader who adds sellers, managers and tools adds operating expense before those hires add gross profit. Sponsors and boards watch whether operating margin improves as the business grows; if revenue rises while operating margin falls, someone will ask whether growth is being bought. Show the margin effect of a hiring plan before you ask for it.
How to calculate it
Operating margin = operating income divided by revenue. A common mistake is comparing margins across companies that classify costs differently, for example one that books field supervision in cost of services and another that books it in overhead.
Example
Fictitious numbersAn HVAC services company has $40 million of revenue, $26 million of direct costs and $10 million of operating expenses. Operating income is $4 million and operating margin is 10 percent. Adding four sellers at $150,000 each, fully loaded, cuts operating margin to 8.5 percent until their sales arrive.
"How many quarters does it take before a new seller's gross profit covers their fully loaded cost?"
Sources
- Operating Margin (Corporate Finance Institute) checked 9 Oct 2026