Lisa Borga

When it comes to assessing the financial health of a company, both margin and profit are valuable tools for identifying performance.

These statistics both provide a measurement of a company’s profitability for a given period.

However, there are significant differences between these two metrics.

The most significant of these is that margin is measured as a percentage term, whereas profit margin is measured in dollar terms.

Both of these metrics offer a crucial view of a company’s performance and provide direct information that it can act upon, so it is important for management and investors to understand how to use each tool.

## Understanding Profit

Profit is one of the most well-known financial formulas used in business, and most people are aware that it represents the amount of money that a company earns past its expenses.

However, there are multiple ways of looking at this, and two of the most popular ways include net profit and gross profit.

Net profit is calculated by taking total sales revenue for a period and subtracting total expenses.

The resulting number will represent a company’s net profit or net loss if the value is negative. The formula for this is:

Net Profit = Total Sales Revenue – Total Business Expenses

This provides a company with the total amount of money that it is left with after all business expenses are accounted for.

In contrast, gross profit only assesses the amount of money that a company is left with after accounting for the direct costs of producing its goods or services.

In order to calculate gross profit, cost of goods sold is subtracted from sales revenue. The formula for this is:

Gross Profit = Total Sales Revenue – Cost of Goods Sold

This value represents the profit that a company earns from its sales in a given period.

## Understanding Margin

Margin or profit margin includes multiple distinct measures of profitability which are expressed as percentage terms.

These variants include gross margin, net profit margin, and operating margin.

These calculations each have unique characteristics and serve to provide a unique assessment of the ratio of profit to cost a company incurs.

## Key Distinctions Between Profit and Margin

• Measurement Terms: Profit is measured in dollar terms, indicating exactly how much money is left over after the sale of a company’s products or services. In contrast, profit margins measure the percentage by which sales revenues exceed the cost of sales.
• Application: Profit shows how much money a company has remaining after accounting for its expenses and is crucial to determining how much cash may be remaining to offer equity holders or for reinvesting in its operations. In contrast, profit margins are more useful as a measure of a company’s efficiency at creating a profit.
• Period to Period Comparisons: Many factors go into determining a company’s profit in a period which can make it difficult to provide a useful comparison of profit between periods. In many cases, the profit margin can provide a more useful comparison.

## Uses for Margin and Profit

As you can see, these concepts are similar.

But, it is important to know the difference between them.

Margin and profit will move proportionally if no other item, such as units or price of the cost of raw materials, selling price, or other expenses change.

But, the margin is the percentage of earnings obtained from a business transaction.

In contrast, the profit is the actual amount gained in dollars.

Looking at margins is useful for spotting trends in the financial health of the company.

Checking the gross margin is also useful for seeing if the cost of goods sold accounts for too large a part of total revenue.

In comparison, the operating margin should be looked at when a company is analyzing the overall operations of the company.

However, if a company is interested in seeing how much money they have made, profit is more useful.

Gross profit is also useful for analyzing whether the markup the company is charging is high enough to ensure a profit.

In contrast, operating profit is a better choice for seeing if the company’s operations are profitable enough to cover its costs.

But, if a company wants to evaluate its overall profitability for a given period, it should look at net profit.

## Final Thoughts

Margin and profit are both tools a company can use to assess its financial performance, but they look at this performance from different perspectives.

If a company is performing a trend analysis on its performance, it is useful to consider margin variants because they give the percentage of total revenue that remains once the different costs are deducted.

If a business wants to see the effect inflation is having on its production costs, it should check its gross margin.

Additionally, if a company wants to see its general operating performance, it should examine its operating margin.

Then along with analyzing the business’s overall profitability, they should look for any trends in the net profit margin.

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1. SBDC California "PROFIT MARGIN FORMULA" Page 1 . August 12, 2022

2. Cornell Law School "Margin" Page 1 . August 12, 2022