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Business Financials – Profit Margins – 3 levels and how they work
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Published on Friday, 27 January 2023 16:39
Profit Margins are actually in 3 levels in the Financial Reports.
And they are all found in one of the main business financial reports, 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 less all the expenses (operating or overheads like rent, wages etc) leaves the operating profit (also known as Pre-Tax Profit, before taxes, but 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 -
In summary, there are 3 levels of profit or profit margins –
Gross profit (after cost of sales deducted from sales/revenue),
Operating profit (sometimes given = after expenses deducted) 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, pre-tax or net level) as a percent of the sales generated.
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