What is the difference between profit margin , gross margin , and revenue ?
In: 135
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.
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