Difference between Gross Profit Margin and Net Profit Margin

Abstract:

In a business and monetary setting, the margin is characterised as the qualification between the acquisition or production of the item or a product to the merchant and its selling cost. Gross profit margin suggests a monetary instrument, utilised to recognise the monetary strength of the business, by portraying how much cash is left in the wake of deducting the expense of manufacturing or production from the sales.

Running against the norm, the net profit margin is a monetary measurement deciding the organisation’s productivity, by showing the level of income or the percentage of income leftover in the wake of taking away expenses, interest, taxes, preferred dividend, and operating expenses.

“Profitability” is the capacity of the organisation to produce benefits from its customary business tasks. The boundary which is utilised for examining the benefits-making capacity of a business is as ‘Productivity Ratios.’ The three significant proportions in this setting are operating profit margin, net profit margin, and gross profit margin.

Meaning of Gross Profit Margin:

Gross margin, or gross profit margin or GP margin is the action that shows how well an organization dealt with its significant business exercises (in regards to material, work, and direct costs) so the association procures a benefit. The gross margin depends on the gross profit made by the organisation over net sales.

With the assistance of gross profit margin, the organisation is equipped for contrasting the current gross benefit and benefits procured previously. Alongside that, projection is additionally finished by the organisation with respect to its future benefits. After the assurance of GP margin, the business can likewise decrease or control different expenses, so the margin might increment in the future.

The formula to calculate gross profit margin is as follows:

Meaning of Net Profit Margin:

Profit margin or NP Margin or net profit margin is a measurement utilised by the elements to distinguish the level of total or actual benefit procured during a specific bookkeeping period. It depends on net benefit, which is obtained by deducting interest, costs, taxes, and expenses from gross profit. Net Profit shows up in the primary concern or bottom line of the income statement.

Net profit margin empowers the organisation to figure out how effectively the organisation assigned its assets to change its sales into the total benefit. Anticipating for future benefits should likewise be possible through NP Margin. Aside from that, the organisation can likewise terminate its fixed or variable costs, so the margin should ascend in the future. Additionally, steps can likewise be taken to further develop benefits in the wake of deciding net profit margin.

The formula to calculate net profit margin is as follows:

Difference between Gross Profit Margin and Net Profit Margin:

GROSS PROFIT MARGIN

NET PROFIT MARGIN

Meaning

Gross profit margin is the level or the percentage of the gross profit over sales.

Net Profit Margin is the level of net profit above sales.

Formula

Gross profit margin = net sales – cost of goods sold / net sales x 100

Net profit margin = net profit/net sales x 100

Ascendancy

Accommodating in being familiar with the level of the benefit acquired from the core business by the organisation.

Accommodating in being familiar with the level of the real benefit procured by the undertaking.

Intent

To be familiar with the proficiency of the organisation in the manufacturing and marketing, and distribution exercises.

To be familiar with the monetary wellbeing of the organisation.

Conclusion:

The assurance of gross profit margin and net profit margin is useful for following out the level of or the percentage of benefit procured by the business entities at different levels. At the gross profit margin, just the expenses and direct costs are factored out from sales for arriving at the gross benefit. Based on which GP margin is determined.

At the net profit margin level, the working and non-working costs are factored out while non-working income is added to gross profit to emerge at net profit. Along these lines, the net profit margin is determined.

Also, see:

Sales Book and Sales Return Book

Factors Affecting Sourcing of Accounting Software

Difference Between Fixed Capital and Working Capital

Difference Between Sole Proprietorship and Partnership

Difference Between Fixed and Flexible Exchange Rate

Difference Between Consumption Goods and Capital Goods

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