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.
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)
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