Gross Profit vs Gross Margin
Companies record financial information about their business activities in order to assess the financial position of the firm. A range of numbers and values are calculated for this purpose, which include the calculation of the company’s gross profit and gross margin. Close attention is paid to these ratios as they are strong indicators of the profits that are made from the company’s sales. The article that follows clearly explains Gross Profit and Gross Margin that are two closely related terms, and shows how the two are similar and different to one another.
What is Gross Profit?
Gross profit is the amount of sales revenue that is left over once the cost of goods sold has been reduced. The gross profit provides an indication of the amount of money that is left over for making other operating expenses. Gross profit is calculated by deducting the cost of goods sold from net sales (this is the number that you get once the returned goods have been reduced from the total good sold). The costs of goods sold are expenses that are directly related to the manufacture of the goods that are sold. In the event that a business is a service provider then the cost of goods sold would become the cost of services rendered. Gross profit is usually used to calculate important ratios such as the gross profit ratio which tells the business owners whether the sales price charged compensates for the costs of selling incurred.
What is Gross Margin?
The gross margin (also called the gross profit margin) is the percentage of total sales that is retained by the company once all costs associated with producing and selling goods and services have been accounted for. Gross margin is calculated as follows.
Gross Margin = (Total sales revenue for the year – Cost of goods sold) / Total sales revenue for the year
The number calculated is the percentage that the company retains on each $1 of sales, to pay for its other expenses. Investors generally tend to invest their money in companies that carry a higher gross margin, meaning that a company with a higher gross margin is making more money.
What is the difference between Gross Profit and Gross Margin?
Gross profit and gross margin are important numbers in analyzing the company’s sales revenue and expenses. These terms are quite closely related to each other and are both derived from numbers that are presented in the firm’s income statement. The gross profit shows the financial position of the firm as a whole – the amount of money that is left over for other expenses. The gross margin shows the percentage of money that was earned in comparison to the costs that were incurred. Gross margin can be used for comparison between other firms in the same industry or industry benchmarks. Furthermore, unlike gross profit, gross margins can be calculated for each product line or individual products or services, which will provide profitability information for each individual product.
Summary:
Gross Profit vs Gross Margin
• Gross profit and gross margin are important numbers in analyzing the company’s sales revenue and expenses.
• Gross profit is the amount of sales revenue that is left over once the cost of goods sold has been reduced.
• The gross margin (also called the gross profit margin) is the percentage of total sales that is retained by the company once all costs associated with producing and selling goods and services have been accounted for.
• The gross profit shows the financial position of the firm as a whole.
• The gross margin can be used for comparison between other firms in the same industry or industry benchmarks.
• Unlike gross profit, gross margins can be calculated for each product line or for individual products or services.