Margin vs Profit

Difference Between Margin and Profit

Both the margin and profit are the ways which help in evaluating the performance and health of the company wherein case of the margin the performance and health of the company are evaluated in the percentage term, whereas, in case of the profit, the performance and health of the company are evaluated in dollars.

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One can either measure the performance in relative percentage terms or absolute dollar terms. There are various ways to check the health of an entity’s business operations. Both qualify to be measures that allow the management to track the operations under check. They tell a story that provides the management with actionable information.

The margin is calculated as a percentage term. It has multiple variants, namely Gross margin, Operating Margin, and Net profit marginNet Profit MarginNet profit margin is the percentage of net income a company derives from its net sales. It indicates the organization's overall profitability after incurring its interest and tax expenses.read more, whereas when it comes to absolute dollar terms to measure the profit, we have Gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more, Operating profit, and Net profit.

Margin vs. Profit Infographics

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Key Differences

The key differences between them are as follows –

#1 – Gross Profit vs. Gross Margin

Gross profit represents the profit in dollar terms after incurring the direct costs associated with producing the goods and services sold by the business entity. Gross profit is calculated as:

Gross profit = Revenue – Cost of Goods Sold

Gross margin represents the percentage of total revenue after incurring the direct costs associated with producing the good and services soldProducing The Good And Services SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more by the business entity. Gross margin is calculated as:

Gross margin (%) = (Revenue – Cost of Goods Sold) / Revenue

#2 – Operating Profit vs. Operating Margin

Operating profit represents the profit in dollar terms after incurring the direct costsDirect CostsDirect costs are costs incurred by an organization while performing its core business activity and can be attributed directly in the production cost, such as raw material costs, wages paid to factory staff, power & fuel expenses in a factory, and so on, but do not include indirect costs such as advertisement costs, administrative costs, etc.read more associated with producing the goods and services sold by the business entity and all the operating expenses, including the depreciation and amortization incurred during the operating cycle. Operating profit is calculated as:

Operating profit = Gross Profit – Operating Expenses -Depreciation & Amortization

Operating margin represents the percentage of total revenue after incurring the direct costs associated with producing the goods and services sold by the business entity and all the operating expenses, including the depreciation and amortization incurred during the operating cycleOperating CycleThe operating cycle of a company, also known as the cash cycle, is an activity ratio that measures the average time required to convert the company's inventories into cash.read more. Operating margin is calculated as:

Operating margin(%) = (Gross Profit – Operating Expenses -Depreciation & Amortization) / Revenue

#3 – Net Profit vs. Net Margin

Net profit represents the profit in dollar terms after incurring the direct costs associated with producing the goods and services sold by the business entity, all the operating expenses, including the depreciation and amortization incurred during the operating cycle, other expenses, interest, and taxes. Net profit is calculated as:

 Net profit = Operating profit – Other Expenses – Interest – Taxes

Net profit margin represents the percentage of total revenue after incurring the direct costs associated with producing the goods and services sold by the business entity, all the operating expenses, including the depreciation and amortization incurred during the operating cycle, other expensesOther ExpensesOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities.read more, interest, and taxes. Net profit margin is calculated as:

Net profit margin (%) = (Operating profit – Other Expenses – Interest – Taxes) / Revenue

Comparative Table

BasisMarginProfit
DefinitionMargin provides a way to measure the performance of the operations of a business entity in percentage terms.Profit provides a way to measure the performance of the operations of a business entity in dollar terms.
ContextSince it is calculated in percentage terms, it provides information in a relative context.Since it is calculated in dollar terms, it provides information in absolute context.
TypesThe most common types are gross margin, operating margin, and Net profit margin.The most common types are gross profit, operating profit, and net profit.
UsageIt provides a perspective that allows the management to view the business in the light of effectiveness and efficiency.It provides a perspective that allows the management to view the business in the light of sheer monetary terms.

Applications

As seen above, they seem to be closely related but still put a different point of view when it comes to an understanding, what each margin or profit calculation implies. When management has to check the trend, then margins serve as an invaluable tool, whereas when the sheer monetary effect needs to be viewed, then profit calculation makes more sense.

So, let us say if management wants to see how much of the cost of goods sold is eating up the total revenue from sales then the grossSales Then The GrossGross Sales, also called Top-Line Sales of a Company, refers to the total sales amount earned over a given period, excluding returns, allowances, rebates, & any other discount. read more margin can very well serve the purpose. Also, if the management wants to have a look at the overall operations of the businessOperations Of The BusinessBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read more, then the operating margin is the right choice. And if the management wants to analyze the overall health of the business performed during the period, then the net profit margin may prove to be the best key performance indicator.

Similarly, if one wants to analyze where the mark-up over the cost of goods and services sold is high enough to cover the production costs, then Gross profit can present the right information. Whereas to check whether the operations are profitable enough to cover all the direct and indirect costsIndirect CostsIndirect cost is the cost that cannot be directly attributed to the production. These are the necessary expenditures and can be fixed or variable in nature like the office expenses, administration, sales promotion expense, etc.read more, then Operating profit does enlighten towards the right direction.

And finally, in order to check the overall profitability for the period of a business entity after incurring all types of costs, including financing costsFinancing CostsFinancing costs refer to interest payments and other expenses incurred by the company for the operations and working management. An enterprise often borrows money from different financing sources to run their operations in return for interest payments and capital gains.read more and taxes, then Net profit is the best alternative out there to be analyzed.

Conclusion

Margin and profit are two tools to look at the financial performance of a business entity but from different perspectives in mind. When looking for trend analysis of the performance of a business entity, one should look at the margin variants as they provide the percentage of the total revenue left after deducting different types of costs.

So, to check the effect of inflation in production cost, one can look at the Gross margin whereas to check the overall operating performance of the business entity one should look at the operating margin and to analyze the overall profitability one should take a look at the trend in Net profit margin.

Similarly, profit help in analyzing business transactionAnalyzing Business TransactionA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements.read more in pure dollar terms. So, using them, one can know about the monetary profitability and the cash cycle, which reflects the liquidity.

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