3. Profits & Profit Margins

What is profit?

The money left over after all costs have been accounted for

What does it mean if the costs are greater than the sales revenue?

Then the firm is making a loss

What is gross profit (GP)?

The difference between sales revenue and the costs directly related to production

What is the formula for gross profit?

Revenue - costs of sales

What is net profit (NP)?

The difference between the gross profit and other operating expenses and any interest

What is the formula for net profit?

Gross profit - (operating expenses + interest)

What is a profit margin?

The amount by which sales revenue exceeds the costs

How can a business understand their performance?

By comparing it to previous years

Why are higher and increasing profit preferable?

It means that more revenue is being converted to profit

What is the gross profit margin?

The proportion of revenue that’s turned into gross profit and is expressed as a percentage

What is the formula for gross profit margin?

(Gross Profit ÷ Sales Revenue) × 100

What is the net profit margin?

The proportion of sales revenue that is turned into net profit and is expressed as a percentage

What is the formula for net profit margin?

(Net Profit ÷ Sales Revenue) × 100