What is the difference between profit margin , gross margin , and revenue ?
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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.
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