What is the difference between profit margin , gross margin , and revenue ?
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Revenue is the money you collect from selling girl scout cookies. It’s what you get in your till from customers.
Gross margin is take how much money you keep after paying for the cookies divided by your revenue. (Cost divided by revenue)
Profit Margin is how much money you have after paying for the cookies, and anything else (uniforms, table rental fees) divided by the revenue. (Profit divided by revenue)
Suppose that you have $10 and that you start a lemonade stand. You pay $5 for ingredients (i.e, water, lemons, and sugar) and $5 for lemonade making equipment (e.g, a table, jugs, etc.)
Now, let’s assume you sell a cup of lemonade for $1 and that you sell 100 cups of lemonade in total.
Your revenue is the total amount of cash you received for selling lemonade, calculated as the cost per cup ($1) multiplied by the number of cups (100). Thus, revenue is $100.
Gross margin is revenue minus variable expenses. Your variable expenses are the cost of ingredients which is $5. Thus, your gross margin is $100 revenue minus $5 variable costs = $95. Since you sold 100 cups, you’re variable cost per unit is $0.95.
Now profit margin takes this one step forward. Begin with your total gross margin of $95. The. Subtract your fixed expenses. In the case of the lemonade stand, this would be the cost of your lemonade making equipment. Thus, your profit margin is $90. For simplicity, I’m ignoring depreciation of capital assets and assuming they are instead expensed.
So to summarize:
Revenue = amount of money received
Gross Margin = Revenue – variable expenses
Variable expenses = cost you incur that vary with the level of production. In other words, you incur higher variable costs the more lemonade you make/sell.
Profit margin = Revenue – Variable Costs – fixed costs
Fixed costs = costs that don’t vary with production. The cost you pay to purchase a standard table is the same whether you make 1 cup or 10 cups.
Hope that helps.
The terms are easy to Google. So I’m going to tell you what they mean to me in context of the business.
Short version,
Revenue is how big you are or how much you sell
Gross margin is how much a product costs to make.
Profit margin or net income is how much of a return I can expect as an owner or investor.
Longer version
Revenue is an indication of how big you are. It drives everything else. For example, do you sell $100 of a product or $100,000.
Other terms have a dictionary definition but get cloudy in everyday conversation. Gross profit or gross margin tells me how much each product costs to make. This is direct cost. Example, I can’t make iron widgets without iron. So my revenue minus my iron cost is my Gross profit/ margin.
Gross margin can be compared to other similar companies. If your Gross Margin is lower than everyone else, you have a challenge to get cost down so you can grow and make more money.
Your Gross margin is then used to cover other costs like the cost of your office or equipment, wages, utilities, etc.
After all expenses are paid your net income is what is left to pay shareholders, extra for you as owner, or keep in the company to buy more equipment.
– Revenue is the money you take in.
– Gross Profit is what’s left after expenses (payroll, rent, marketing, etc)
– Gross Margin is the percentage of revenue that is Gross Profit
– Net Profit is what’s left of your gross profit after the various governments shake you down for their cut of the action (taxes)
– Dividends are the share of net profits paid out to the owners (shareholders) of the business. Some companies like Amazon and Apple do not pay any dividends and instead keep the money in the bank to run the business when times are tough and revenues are down.
If you sell 2 cookies for $5 then your total revenue is $5 ($2.50 per cookie).
If materials (dough, water and chocolate chips) costed you $2 ($1 per cookie) then your gross margin is revenue – costs of goods sold = $5 – $2 = $3.
Then let’s say you rent your cookie stand for $1 a day. So after your gross margin of $3 you have to deduct $1 for yoour fixed expense of renting the stand and finally you have a profit or net margin of $2 (assuming no taxes in this example).
Gross margin is important because if you sell more cookies you’re still earning a gross margin $1.5 per cookie sold, and since your fixed expenses won’t change if you sell 1 or 10 cookies (you still just lay $1 for renting the stand per day) it will go straight to your profit margin.
There are a lot of very good answers but everyone is missing a key detail:
Margin is a percentage, not a dollar amount. Revenue minus product costs does NOT give you your gross margin. It gives you your gross profit. To find your gross margin you must divide gross profit into revenue and multiply by 100 to result a percentage that is your gross margin.
Same thing with profit margin. Calculate your net profit like other folks have said by taking revenue minus all costs to run the business, then divide that result into revenue.
Say you’re selling books
Revenue is the total money you made from books this month
Gross Margin is Revenue for the month, minus the price it cost for you to get the books (think the mark-up on books).
Profit Margin is what’s left of Revenue when there’s nothing left to pay off; what you keep for the business after you have paid all of your wages, bills, and fees.
The explanation for revenue makes it sound the same as cash, which it is not. And if you’re calculating margins you have to take into consideration the element of time and performance obligations. For example if you pay Dropbox $240 for an annual license the revenue might only be $20 per month (the excess cash is recorded as a liability on the balance sheet until the performance obligation is complete). in this case evenly over a 12 month license period.
So on day one of the $240 sale, revenue may only be $0.66, not $240. This can significantly impact the margins as defined above.
Profits is revenue – expenses.
So let’s say you have a business that makes bookshelves. You have to buy lumber, saws, drills, and screws. You put in the labor and turn that stuff into a bookshelf.
All that stuff cost money. Let’s say you paid $30 in all those materials and additionally $600 for the machines. But you sell each bookshelf for $60.
So you make and sell 20 bookshelves. So some quick math tells us our revenue is 20 x $60 or $1,200.
However we have to consider our expenses. $30 x 20 = $600
And then we also have to consider the one time cost of the equipment.
$600+$600 = $1,200.
So revenue is $1,200 but because costs were $1,200 our profit is 0.
One isn’t as clean as the other two ?
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