Business Finance 101 – Profit Margin – 3 levels of Profit Margin – Where they are and how to understand them


Business Finance 101 – Profit Margin – 3 levels of Profit Margin – Where they are and how to understand them
Profit Margin – 3 levels of Profit Margin – Where they are and how to understand them

There are 3 levels of profit margin in the Financial Reports.

And they are all in one of the main business reports we use – it is the Profit & Loss Statement or Income Statement. The statement shows all the sales for a period, less cost of goods (if you sell product) leaving gross profit, then from that all the expenses (operating or overheads like rent, wages etc) leaves  the operating profit (not always reported), then from that less any taxes and non-regular income and expenses, gives us the final net profit.

The common Profit and Loss often doesn’t have the Operating Profit and looks like this –

bus-profit-loss-diagram

In summary, there are three main levels of profit or profit margins:

Gross profit (after cost of sales deducted from sales/revenue);

Operating profit (sometimes given = after expenses deducted) also known as Pretax profit (before tax and other non-regular items), and

Net profit (final profit, after tax and other non-regular expenses and income).

Note that “profit”, “earnings” and even “income” are all used interchangeably, and mean the same thing.

When the term “margin” is stated, it can apply to the absolute dollar number for a given profit level and/or the number as a percentage of sales/revenues.

The absolute amount, the dollar amount, is on the Profit & Loss Statement.

The net profit margin is also commonly calculated as a percentage calculation (ratio) to provide a measure of a company’s profitability on a historical basis (3-5 years) and a comparison to peer companies and industry benchmarks. The margin is the amount of profit (at the gross, operating, pretax or net level) as a percent of the sales generated.

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