If you are into business, you have to deal with many words and terms that are similar in meaning, and yet different from one another, as there are several ways to look at profit in a business. You have markup, profit, margin, gross profit, operating profit, net profit, and so on. But for now we shall confine ourselves to margin and profit that are two concepts enough to confuse a person who has just started out. Let us take a closer look.
Suppose you are in business where you provide your services, so the amount you receive in lieu for your services is your profit as there are no purchases to be deducted from your earnings. This means that if you are a freelancer, all the money that you make is termed as your profit. But when you are selling items that you have purchased, you need to deduct all expenses from your sales to arrive at the profit of your business. So if a fruit vendor has purchased fruits for $100, and sells all his stock, and at the end of the day has $140 in his pocket, his profit is $140-$100= $40. This makes it clear that profit is the amount of money that you are left with after deducting all your expenses in a business (including the cost of the products).
Taking the above example again, we find that the fruit vendor made a profit of $40 on an expense of $100, which gives him a profit margin of 40%. In this specific case, both profit and margin happen to be same though, it needs to be clarified again that while profit is in absolute number (the currency that the businessman is dealing in), margin is always in terms of percentage.
To make the two concepts clear, take a look at the following example.
Suppose a roadside vendor purchases goods for $80 and by the end of the day, he has sold everything, generating $100 in sales. It is clear then that he has made a profit of $20 in a day. As far as his margin is concerned, it is calculated as follows.
[(100 – $80)/ $100] X 100% = 20%
Generally, business where goods are sold in huge quantities keep low margins, while in businesses where products sell in small quantities, the profit margin is kept high.
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In brief: Difference Between Margin and Profit • Profit is the amount of money in hand of a business man after selling his goods and deducting his expenses that include cost price of products • Margin is the profit percentage over cost price.
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