PROFIT VS MARGIN
Both profit and margin are the ways which help in analysing the performance and health of the entity. In case of the margin, the performance and health of the entity are analysed in percentage terms and on the other hand, in case of profit, the health and performance of the entity are evaluated in terms of rupees or currency of that particular nation.
One can either measure the growth and performance in absolute rupee terms or percentage terms. There are different ways to check the health of a company's business operations. Both of these qualify to be the aspects that allow the management to track the operations under check. They tell a story that provides the management with the ideal and actionable information and details.
Margin has multiple variants, namely Gross margin, Net profit margin and Operating margin whereas when it comes to absolute rupee terms we have gross profits, net profits and operating profits.
As discussed above, both these seem to be interrelated but still put a different point of view when it comes to an understanding of what each profit or margin calculation implies. When management needs to gain understanding of trends, the margins serve as an invaluable tool on the other hand when the sheer monetary effect needs to be viewed then profit calculation is needed.
So, we can say that management wants to see how much the cost of goods sold is eating up the revenue from sales then the gross margin can very well put up the purpose. Also, if the management is looking to have an overall view at the operations of the business, then the operating margin is the apt choice.
And if the management wants to analyse the overall performance and health of the business performed during the period, then the net profit margin can prove to be the apt indicator.
Identically, if management wants to analyse where the markup over the boat of goods and services sold is higher enough to cover the cost of production, the gross profit can present the ideal information. Whereas to check whether the operations are profitable enough to absorb all the cost (direct and indirect), then operating profit does enlighten towards the right direction.
And lastly, in order to have a look at the overall profitability for the entity after incurring all the cost, including the financing costs and taxes, then net profit is the best alternative out there to be analysed.
|Definition||Profit provides a way to measure the operations and performance of an entity in rupee terms.||Margin provides a means to measure operations and performance of an entity in percentage terms.|
|Context||Since it is calculated in rupee terms, it provides absolute information.||Since it is calculated in % terms, it provides relative information.|
|Usage||It provides a perspective that permits the management to view the business in the light of monetary terms.||It provides a perspective that permits the management to look at the business in light of efficiency and effectiveness.|
|Types||Most general types are gross profit, net profit and operating profit.||Most general types are gross margin, net profit margin and operating margin.|
Profit and margins are 2 tools to look at the financial information and analyse the performance of an entity but from different perspectives. When looking for trend analysis of the performance of an entity, one should look at the margin as they provide % of the total revenue after deducting different costs.
Hence, to check the effect of inflation in production cost, one can look at the gross margin whereas to check the overall operating performance of the business entity one should find the operating margin apt and to analyse the profitability, net profit margin is to be chosen.
Identically, profit helps in analysing business transactions in pure rupee terms. So using them, one can know about the monetary profitability and the cash cycle which is the reflection of liquidity.