There are lots of terms that are used interchangeably in the world of revenues and sales. Such two terms are Gross Profits and Gross Margin that are used as the measure of sales. But they are very different from each other and have a different purpose of representing the prices. They both are used to show the probability of a business working as a key financial metric.
Gross Profit vs Gross Margin
The main difference between Gross Profit and Gross Margin is that Gross Profit is the Profit which is gained from the selling of the company’s products and how much the company made from that product after paying all of the direct costs of producing the products whereas Gross Margin is the percentage by which one can determine how much of the percentage of revenue of the company is greater than its cost of goods sold (COGS).
Gross Profit is a financial and value metrics that help a company to determine the financial goals and improvements in their company’s production process. It is calculated as Cost of Goods Sold subtracted from Net sales revenue. It is usually stated in numbers and shows how much is company productions in terms of revenues which are they generating from their selling of the goods.
Gross margin is basically a measure of operational efficiency for the profits generated by a particular business. It is used in comparing organizations. Stated as a Percentage, Gross margin is calculated as Gross Profit by sales revenue multiplied by 100. It is used in Product line descriptions. Any business or organization has the aim to gain a higher gross margin as much as possible.
Comparison Table Between Gross Profit and Gross Margin
| Parameters of Comparison | Gross Profit | Gross Margin |
| Definition | Gross profit shows that how much the company earned from the sales of their products after paying all the costs of producing their products and services. | The gross margin percentage is used to show the revenue the company is generating from the costs which are used in producing its products and services. |
| Product line Determination | It is not used in the Product Line. | It is used in the Product line Determination. |
| Purpose | Its purpose is to show the financial position of the Entity. | Its purpose is used to show the percentage of the money earned in comparison to the cost. |
| Calculation | It is calculator as Net Sales Revenue – Cost of Goods Sold | It is calculated as Gross Profit / Sales Revenue x 100 |
| Benefits | Its benefit is that it is used to determine the cost of the goods. | Its benefit is that it helps to determine the price of goods and services. |
What is Gross Profit?
Gross Profit is obtained when all the costs of producing the products and services belonging to the company, such as manufacturing and selling, are deducted from the revenue generated. It shows the actual figure that a company generates. It indicated that how well a company is making use of the labor, manufacturing the goods and how well the services are being offered to the clients.
If one needs to have the knowledge of the financial performance of the company, then one can know them by taking a look at the gross profits. They help to know better how much costs are needed further to generate the revenue. The gross Profit decreases in the case when the cost of sold goods increases, and thereby there will be less money left for the business expenses such as operating expenses and vice versa.
What is Gross Margin?
Gross Margin is also called Gross profit margin and is stated as percentages and ratios. They are shown as the profits gained by the company after excluding the selling, general, and administrative (SG&A) costs. Every organization wants to have a higher gross margin which can further help in paying various costs and debt obligations.
It is a financial metric which indicates that a company has more money to pay for the additional costs such as hiring extra labor, investing in future options, operating costs. It can not be a good option for price strategy but is definitely helpful in showing the management of the company’s revenue in upgrading the production of its costs and services.
Main Differences Between Gross Profit and Gross Margin
- Gross Profit is calculated as Net Sales Revenue – Cost of Goods Sold, whereas Gross Margin is calculated as Gross Profit / Sales Revenue x 100.
- Gross Profit is represented as a whole number, whereas Gross Margin is represented as a Percentage.
- Gross Profit is not used in the Product Line Determination, whereas Gross margin is used in Product line Determination.
- Gross Profit has a benefit that it is used to determine the cost of the goods, whereas Gross Margin has a benefit that it helps to determine the price of goods and services.
- Gross Profit has the purpose of showing the financial position of the Entity whereas Gross has the purpose is used to show the percentage of the money earned in comparison to the cost.
Conclusion
Both these above financial metrics are used to have a fair idea of the status of the company of how it going, and what should be improved. Gross Margin and Gross Profit of the current year both can be used by the company to set their financial goals and set the best profit objectives. There are many ways to do these, such as cutting the overhead, pursuing a more effective sales plan, assessing debt options, and many more. It is up to you what fits best for your company and helps you to generate more profit and gross margin.
They both provide a good indication of how the company is profiting, but they also come with a demerit. They are not a thorough measure of the profitability as they don’t have the inclusions of operating expenses, taxes, interests, etc.
References
- https://clutejournals.com/index.php/JBER/article/view/2607
- https://www.sciencedirect.com/science/article/pii/S0147596713000139