Each of Us -- Providing career advice and career development information for working women interested in advancing in the workplace

Profit vs Profit Margin

Most of us have heard the terms profit and profit margin. However, they are often used interchangeably, and mistakenly. Overemphasis or inappropriate emphasis on one or the other can be very costly. As you conduct business and observe what is going on around you, keep this in mind. You might discover a way to impact your corporation’s bottom line.

Profit refers to the amount remaining after expenses have been subtracted from revenues. Entire companies, departments, and individual products are measured in this way. Costing, or determining the expenses allocated to certain products can become complex, but once expenses are determined and subtracted, profit is the result. Profit is often measured at least 3 times in an accounting period, after direct costs, such as sales and manufacturing, after all expenses except taxes, and after taxes.

Profit margin refers to the percentage of total revenues which profit represents. If a product sells for $10,000 and the profit is $1,000, it holds a 10% profit margin. Again, anything from entire companies to individual products are measured in this way. The profit margin expected differs greatly from one industry to another. A 4% profit margin may be considered excellent in the grocery business, while a 30% margin might be considered average in the software business. (See Each of Us)

At times, decisions are made by looking at only one of these, without considering the other. You will sometimes see people sacrifice large orders and huge profits because the profit margin would not be what they want. Individual products may not be brought to market because they could not generate a given margin, even though they might earn money and create a new market for the company. All of us can be shortsighted at times, especially if we are measured on either profit or profit margin alone.

It might be appropriate to question the validity of these decisions. Maybe you can point out the missed opportunity in profit or increased business and suggest a different measurement of success. Awareness is the first step, Small adjustments make a big difference.

This site is for working women everywhere, to help improve their success, pay, and self-confidence.

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