Gross Margin vs. Gross Profit: What’s the Difference

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In this age, accounting services have already become easily accessible even to small businesses thanks to the industry's growth over the years. And that's why business owners in places like Kearny, New Jersey can spend more time on their establishment’s operation and less on calculations and paperwork.

But while it’s true that you can basically leave your financial statements to a certified public accountant (CPA) without worries, it wouldn’t work to your favor not to know the concepts and theories behind the necessary processes since it’s all going to be about your business anyway.

On that note, many are confused by the terms gross margin and gross profit. These two pertain to extremely similar concepts. Both show the profitability of a company, but they do so through a different angle. And so, it’s a given that they do have their differences. And each is worth noting, especially since it’s going to be your finances on the line if anything on your documents ends up being misunderstood.

Other than that, the Generally Accepted Accounting Principles or GAAP also demands that these concepts be properly displayed and labeled on all profit and loss statements (also known as P&L statements), so not being able to do so may result in certain sanctions.

Gross Margin vs. Gross Profit

Gross Profit refers to a business’ total amount of revenue (earnings/sales during a certain period) after deducting the costs spent in order to generate those sales; in other words, operations and product costs. So with those taken into consideration, an establishment’s gross profit rate formula would be: 

Gross profit = Total Revenue - Cost of Goods Sold (COGS)

And once the gross profit is calculated and reported, the figures would then indicate the business’ capability in making sales from their production, raw materials, labor, equipment and utility costs, as well as other similar expenses that are directly related to generating sales. Hence, the gross profit indicates whether you’re spending too much in relation to your production or services.

The figure that determines this capability is the Gross Margin. Also known as gross profit margin, this refers to the percentage of sales revenue that exceeds the business’ COGS. So the formula for this would be:

Gross Margin = Gross Profit / Total Revenue

And a higher percentage derived from this calculation would show that a business is more effective when it comes to handling its costs and producing profit.

So as you can see, there are many aspects to a financial report that are heavily reliant on computations and highly technical concepts — gross profit and gross margin being among them. And if you’re a busy entrepreneur in a place like Kearny or Newark or other nearby areas, then perhaps you would prefer staying on your business’ frontlines of operation rather than working on such reports behind a desk. And that’s why accounting services are far too essential.

Now, if you’re looking for a local accounting firm to help you out with your reports and statements, then you will regret not getting in touch with ours at Nicholas J. Coco, CPA. We provide assistance for all matters involving finances, and we’re proud to say that we’re one of the best in our serviced areas. So if you’re living or operate a business in Kearny or in other cities within this region of New Jersey, then you can choose us to do tax services, financial statements, bookkeeping, and many more. Give us a call at 201-955-3100 or send us an email at ncoco@bellatlantic.net to begin a discussion with us. Feel free to send over a message through our contact page as well.

You don’t have to do your own business accounting. For a top-line CPA near you, choose Nicholas J. Coco, CPA.

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