What is the difference between profit margin , gross margin , and revenue ?
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Revenue is total money earned from sales. Gross profit is revenue minus expenses before taxes. Profit margin is gross profit as a percent of revenue.
Imagine that you make cookies , then rent a small stand to sell them:
**Revenues** is all the money you got from customers who bought your cookies.
**Gross margin** is Revenues minus all the ingredients you bought for your cookies (flour, milk eggs, I don’t know, I’m not a good cook). It would be even simpler if you bought cookies wholesale and resold them
**Profit margin** is your Gross margin minus all the other costs : the rent fee for your stand and your wages as a baker
*Edit : I took a quite a few shortcuts / oversimplifications in that ELI5, thanks to all who took the time to clarify / specify in the comments*
For an example, let’s say you run a hot dog stand where you pay $1 for a hot dog and its bun then sell it for $2.50.
Revenue is the money your business takes in which is $2.50 per dog.
Gross margin is the difference between the cost of goods and their selling price. Here it would be $1.50 per dog.
Profit is what you get to keep after covering *all* the costs. That $1.50 isn’t what you keep. You need to subtract the cost to heat the food, pay for your business license, rental for your hot dog cart, etc.
Revenue is how much money you get.
Gross margin is how much money you get minus the cost of whatever it was you sold.
Profit margin is how much money you get minus the cost of whatever it was you sold minus the cost of whatever you spend running your business.
Revenue/income is the (gross) amount received from sales or other income streams.
Gross profit is income less costs attributable to that income (e.g. cost of sales – the cost of stock purchases)
Operating profit is gross profit less other operating expenses (admin, distribution).
Net profit is what’s left after all expenses are paid including interest and tax. Tax is the last thing to be deducted.
Margin is the difference between the gross and net figures divided by the gross figure, mark-up is the difference divided by the net figure. For example, item ‘x’ costs you £1, you sell it for £1.50, that’s a 50% mark-up and a 33% margin. You make sales of £1.5m with goods costing £1, that’s a 33% gross profit margin.
gross margin is gross sales/revenue – cost of goods sold. it is revenue – cogs (cost of goods sold) then divide it by revenue
profit margin is the after taxes.
revenue is the total amount of sales generated but has not been deducted for expenses incurred
(im sure of the gross margin but the other two not so sure)
Buy a computer for $1000 and add 30% gross margin to it.
Sell the computer for your $1000 cost + 30% = $1300
Your gross margin is $300 (30%) , but;
You spent $30 for admin
You spent $15 shipping, so;
Your profit margin is actually $300, minus $45, which is $265.
Sell 100 computers, your revenue is $130 000. Your gross profit is $26 500.
Good lordy. So it’s easier to go in reverse order to how you listed things, with a couple of additional terms added in, like Cost of Goods sold (COGS), Gross profit and Net Profit; The terms are useful in the subsequent explanation, it also makes the formulas easier as each steps provides a figure needed for a subsequent step.
Revenue : This is the total amount of money you are getting for the stuff you sell. (Total money received from sales = Revenue)
Cost of Goods Sold (COGS) : This is simply what was paid for the items that were sold (If there is stock in hand, then it is calculated, for a given period, as Opening Stock + Items bought for resale – Closing Stock.)
Gross Profit : This is the amount of money you made from selling items before taking other costs into consideration : Revenue – COGS
Gross Margin : Gross Profit divided by Revenue, usually expressed as a percentage
Net Profit or Loss : This is what you actually made or lost from the business endeavors. It’s what is left of the gross profit after all other business expenses & incomes have been added or deducted. (Gross profit + other income – all expenses)
Profit Margin : Net Profit divided by the Revenue, also usually expressed as a percentage.
I sell cars at a car dealership:
Revenue: I sell a Jeep for $50k
Gross Margin: Dealership paid Jeep $45k for the inventory, so dealership only keeps $5k
Profit Margin: salesperson got their commission, dealership pays rent and utilities, employee health insurance, other various insurance, etc. gets paid from gross margins brought in on cars sold. After the bills are paid, $1000 is left. That’s the profit margin.
Followup: why is EBITDA the magic metric, instead of earnings AFTER interest, taxes, depreciation, and amortization?
If I earn $100 after expenses but before $20 in taxes, it’s not like I get to keep that $20 or reinvest it. So why does business care about pre-tax, or pre-ITDA earnings?
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