Gross vs Net Profit Margin: Difference and Insights

In the thrilling world of finance, one battle royale takes center stage: gross vs net profit margin. In one corner, we have gross profit margin the heavyweight champion of revenue minus the cost of goods sold. In the other corner, the challenger, net profit margin ”“ the underdog looking to conquer all expenses.

Imagine it as the battle of the bucks, a clash of coins, and a tussle of the tenners.

Our mission?

To dissect, decipher, and ultimately declare a winner in this epic clash of the margins.

But how do we keep track of this epic battle, you ask?

Fear not, for we have the power of charts and graphs at our disposal. With their colorful lines, bars, and pie slices, they transform boring numbers into captivating visuals. Consequently, they help us decipher the intricate dance of profit margins with ease.

Join me – let’s chart our way to financial success. It will be a wild ride, but trust me, the rewards will be worth it.

Table of Content:

1. What are Profit Margins?
2. Gross vs Net Profit Margin: What is the Difference?
3. Gross and Net Profit Margin: What is Good?
4. How to Improve Your Profit Margin?
5. How to Interpret Your Profit Margins?
6. Wrap Up

What are Profit Margins?

Definition: Profit margins are financial metrics that reveal a company’s profitability. They express the percentage of profit relative to revenue. We have two profit margins:

• The gross margin shows a profit after deducting the cost of goods sold.
• The net margin considers all expenses, like taxes and salaries.

Understanding these metrics is essential for assessing a company’s financial health. High margins signify strong profitability, while low margins may indicate financial challenges.

Gross vs Net Profit Margin: What is the Difference?

The key distinction between gross vs net profit margin lies in the scopes outlined below:

Calculation

• Gross profit margin: Calculated by subtracting the cost of goods sold (COGS) from total revenue. Then, you divide it by total revenue and multiply by 100. The formula is;
• Net profit margin: Determined by subtracting all expenses, including COGS, taxes, operating costs, and interest, from total revenue. Then, you divide by total revenue and multiply by 100. The formula is;

Scope of Expenses

• Gross profit margin: Considers only the cost of goods sold, which includes expenses directly tied to production or manufacturing.
• Net profit margin: Takes into account all expenses incurred, including indirect costs like marketing expenses, salaries, rent, utilities, and taxes.

Purpose

• Gross profit margin: Measures the efficiency of the production or service delivery process. It indicates how well a company can control its direct costs and generate profit from its core operations.
• Net profit margin: Reflects the overall profitability of a business after considering all expenses. Thus, it provides a more comprehensive view of the company’s financial health.

Interpretation

• Gross profit margin: A high gross margin suggests efficient production and pricing, while a low margin may indicate production inefficiencies.
• Net profit margin: A high net margin signifies strong profitability after all expenses, while a low margin could signal financial challenges.

Use Cases

• Gross profit margin: Useful for industries where production costs vary significantly. Or where cost control is a critical success factor, such as manufacturing or retail.
• Net profit margin: Provides a holistic view of a company’s financial performance, making it essential for investors, creditors, and analysts.

Gross and Net Profit Margin: What is Good?

• Gross Profit Margin

A good gross profit margin varies by industry. Typically, industries with higher production costs, like manufacturing or retail, may have lower gross profit margins, around 20-40%. Conversely, service-oriented industries like technology or software may aim for higher gross margins, often exceeding 60%.

Generally, a solid gross margin allows a business to cover its operating and overhead expenses. All this while still making a profit from its products or services.

• Net Profit Margin

A good net profit margin allows a company to generate a healthy profit after considering all expenses. Again, this benchmark varies across industries. Businesses operating in sectors with substantial operating expenses, such as manufacturing, may exhibit relatively lower net profit margins. Conversely, enterprises in less cost-intensive fields, like software development, may have higher margins.

Typically, a net profit margin exceeding 10% is considered favorable. However, this can vary depending on industry practices and economic circumstances. Businesses consistently achieving double-digit net margins get favorable attention from investors.

How to Improve Your Profit Margin?

Boosting your profit margin is like cooking up a delectable financial feast. Let’s whip up the perfect recipe:

1. Increase prices: While it may seem counterintuitive, increasing your prices can work wonders for your profit margin. However, tread lightly and maintain a balance that won’t scare away your beloved customers. Only aim for the moon if you’re selling moon rocks.
2. Reduce costs: Every dollar saved is a dollar earned, they say. Evaluate every aspect of your operations to identify areas where costs can be trimmed. The leaner you get, the healthier your margins become.
3. Diversify product/service offerings: Variety is the spice of profit, they say. Adding new offerings can attract fresh customers and open doors to untapped markets. Think of it as a chef adding new dishes to the menu; more dishes, more diners. Just be careful not to go overboard and end up like a buffet with too many questionable dishes.
4. Improve efficiency: Streamline processes, adopt automation, and watch your profit pot simmer to perfection. Less effort, more money.
5. Upsell and cross-sell: Once customers are through the door, entice them to stay for the whole show. Offering complementary products or services is like suggesting dessert after a sumptuous meal. Who can resist?
6. Focus on high-margin products/services: Don’t be a jack of all trades and master of none. Focus your efforts on those items that dance the profit cha-cha. Remember, it’s not about quantity; it’s all about quality – quality profits.
7. Monitor and analyze financial data: Regularly dissect your financial data for clues and trends. This detective work reveals opportunities and exposes lurking profit-pinching culprits.

How to Interpret Your Profit Margins?

Profit margin analysis is like peering into a crystal ball, unlocking hidden insights from a sea of numbers. But what good is it if you can’t present your findings in a visually captivating way?

Enter data visualization, the superhero of analysis. Visuals turn spreadsheets into works of art, allowing you to spot trends, patterns, and outliers at a glance.

But alas, the age-old hero, Excel, falls short in the visual spectacle department, especially when illustrating complex concepts like marginal revenue vs marginal cost, leaving us yearning for more. That’s where ChartExpo comes in to save the day with its intuitive interface and powerful features.

Benefits of Using ChartExpo

• Say goodbye to tedious data analysis and presentations and say hello to a more effective and efficient process. ChartExpo offers many visualizations, giving you the freedom to handpick the perfect one for your data.
• ChartExpo simplifies data visualization with its user-friendly interface. No coding skills are required.
• Unleash your creativity with ChartExpo’s customization options. Play around with colors, fonts, and styles to make your data reflect your unique style and preferences.
• Get the most bang for your buck with ChartExpo. Enjoy a free 7-day trial to explore its features, then opt for the affordable $10 monthly plan. It’s a win-win for your data visualization needs and your wallet.

How to Install ChartExpo in Excel?

1. Open your Excel application.
2. Open the worksheet and click the “Insert” menu.
3. You’ll see the “My Apps” option.
4. In the office Add-ins window, click “Store” and search for ChartExpo on my Apps Store.
5. Click the “Add” button to install ChartExpo in your Excel.

ChartExpo charts are available both in Google Sheets and Microsoft Excel. Please use the following CTAs to install the tool of your choice and create beautiful visualizations with a few clicks in your favorite tool.

Example

Let’s say you want to analyze the data below to determine the profitability of your business operations.

Month	Gross Profit Margin (%)	Net Profit Margin (%)	Operating Expenses ($)
Jan	45	20	7,000
Feb	48	22	7,200
Mar	47	21	7,600
Apr	50	25	8,000
May	49	23	8,200
Jun	52	27	8,400
Jul	51	26	8,700
Aug	49	24	9,000
Sep	46	22	9,800
Oct	48	23	10,600
Nov	50	25	11,000
Dec	53	28	11,800

Follow the steps below to learn how to create a gross margin vs net margin chart with ChartExpo.

• To get started with ChartExpo, install ChartExpo in Excel.
• Now Click on My Apps from the INSERT menu.

• Choose ChartExpo from My Apps, then click Insert.

• Once it loads, scroll through the charts list to locate and choose the “Multi-Axis Line Chart”.

• Click the “Create Chart From Selection” button after selecting the data from the sheet, as shown.

• ChartExpo will generate the visualization below for you.

• Click the Settings icon and change the “Data Representation” as Follows:

• If you want to have the chart’s title, click Edit Chart, as shown in the above image.
• Click the pencil icon next to the Chart Header to change the title.
• It will open the properties dialog. Under the Text section, you can add a heading in Line 1 and enable Show.
• Give the appropriate title of your chart and click the Apply button.

• Let’s add the $ sign with the “Net Profit Margin” values.
• Click the highlighted pencil icon. Expand the “Label” properties to add the Prefix value ($ sign).

• You can Set Precision “zero”:

• Let’s add the % Sign with the “Gross Profit Margin” values.
• Click the highlighted pencil icon. Expand the “Label” properties to add the Prefix value (% sign).

• You can set the Precision to “zero”.

• Let’s add the Dollar ($) sign with “Operating Expenses” values.
• Click the highlighted pencil icon. Expand the “Label” properties to add the Prefix value ($ sign).

• You can set the Precision to “one”.

• You can change the Legend shape of Gross Profit Margin into a column by clicking the small pencil icon as follows:

• You can change the Legend shape of Net Profit Margin into a Line and circle by clicking the small pencil icon as follows:

• Click the “Save Changes” button to persist the changes made to the chart.
• The final look of the Multi-Axis Line Chart is as shown below:

Insights

• The gross profit margin has shown a consistent upward trend, rising from 45% in January to 53% in December. This indicates that the company is generating higher profits per sale.
• While the net profit margin is increasing, it’s not growing as robustly as the gross profit margin. This indicates rising operating expenses in tandem with expansion.
• Operating expenses have steadily risen, from $7,000 in January to $11,800 in December, primarily due to the company’s expansion endeavors.
• Overall, the company is performing well and experiencing monthly revenue growth.

FAQs

What are profit margins?

Profit margins are financial metrics that gauge a company’s profitability. Gross margin measures profit after subtracting production costs from revenue. On the other hand, net margin considers all expenses, like taxes and salaries. High margins indicate strong profitability.

Which is better, gross profit margin or net profit margin?

Neither is inherently better; they serve different purposes. Gross profit margin assesses core operational profitability, while net profit margin offers a comprehensive view considering all expenses. The choice depends on what aspect of profitability you want to evaluate.

Can net profit be higher than gross profit?

Yes, net profit can be higher than gross profit. This occurs when a company’s operational expenses, taxes, and other costs are lower than its gross profit. It indicates efficient cost management and can lead to a healthy net profit margin.

Wrap Up

Our journey through gross vs net profit margin has been nothing short of illuminating. We’ve delved deep into the intricacies of these metrics, each offering a distinct perspective on a company’s profitability.

Gross profit margin, like the flashy exterior of a sports car, showcases the raw power of core operations. It lays bare the efficiency of production and pricing strategies. Thus, it acts as an initial litmus test for a business’s financial health.

On the other hand, net profit margin, the cozy interior, reveals the true treasure trove of profitability in the comparison of gross vs net profit margin. It takes into account every expense, from taxes to office snacks. Consequently, it provides a comprehensive reflection of a company’s financial performance and where the rubber meets the road.

We’ve seen how these metrics can visually tell their profitability story with charts and graphs. They unveil trends, highlight challenges, and celebrate successes with undeniable clarity.

Do not hesitate.

Embrace these margins and ChartExpo today, for in finance, insight is power, and numbers never lie.