What does the term "margin" indicate in finance?

The term "margin" in finance refers to the difference between the selling price of a product or service and its production cost. This concept captures the profitability of a business transaction and can influence pricing strategies and overall financial health. When calculating margin, businesses can determine how much profit they are making on each unit sold, which is crucial for making informed decisions on inventory management, pricing, and sales strategies.

Understanding margin helps businesses assess their efficiency in terms of cost management and pricing policies. A higher margin indicates greater profitability, which can allow a company to reinvest in its operations or distribute profits to shareholders. Thus, recognizing margin is essential for evaluating both short-term performance and long-term viability in the competitive marketplace.