Profit Margin Calculations
Two shops can both make a profit, yet one is doing far better. Margins show how much profit a business keeps from its sales. Learn to calculate them, and to read them wisely.
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More than just profit 💰
How can you tell if a business is doing well? Profit on its own does not tell the whole story. **Margins** show how much profit a business keeps from every pound of sales. This module is about gross and net profit, profit margins, the average rate of return, and the limits of the numbers.
Words to know 🔑
Four ideas run through this topic:
Gross and net ⚖️
There are two kinds of profit, and they are worked out in steps.
What is gross profit? 🎯
How is gross profit worked out?
- Revenue minus the cost of sales
- Revenue plus all of the costs
- The total money coming in
- The tax a business pays
Work out the margin 🔢
An interactive activity.
What the numbers miss 📉
Financial figures are useful, but they have limits. They are historic, so they show the past, not the future. They also ignore non-financial factors such as reputation, staff morale and customer loyalty. So use the numbers to inform a decision, not to make it on their own.
Reading the data ✅
Which THREE are limitations of relying only on financial data?
- It is historic and shows only the past
- It ignores non-financial factors like reputation
- It may not predict the future
- It is always completely accurate
- It removes all business risk
Match the formula 🔗
- Gross profit
- Net profit
- Gross profit margin
- Average rate of return
- Revenue minus the cost of sales
- Gross profit minus other expenses
- Gross profit divided by revenue, times 100
- Average annual profit divided by cost, times 100
Rate of return 🧮
An interactive activity.
In the right order 🪜
An interactive activity.
Complete the idea 🧩
Gross profit is revenue minus the _____ of sales. Net profit is gross profit minus other _____. The gross profit _____ shows gross profit as a percentage of _____. A higher margin usually means the business keeps more _____ from each sale.
True or not? 🖍️
An interactive activity.
Read the numbers 🧭
An interactive activity.
Evaluate it ✍️
An interactive activity.