What is the difference between revenue, profit, and gross margin?

These three terms describe different stages of a business's financial performance. Here is the breakdown:

1. Revenue (Top Line)

Revenue is the total amount of money a business brings in from selling its goods or services before any expenses are taken out. It is often referred to as "sales" or the "top line" because it sits at the very top of an income statement.

• Formula: Price of goods/services × Number of units sold.

2. Gross Margin

Gross margin shows how efficiently a company produces its goods or provides its services. It represents the money remaining after subtracting the "Cost of Goods Sold" (COGS)—the direct costs required to create the product, such as raw materials and labor. It is usually expressed as a percentage.

• Formula: (Revenue – COGS) / Revenue × 100.
• Example: If you sell a shirt for $100 and it cost $60 to make, your gross margin is 40%.

3. Profit (Bottom Line)

Profit, often called "net income" or the "bottom line," is what remains after all expenses—including COGS, operating expenses (rent, marketing, salaries), interest, and taxes—are subtracted from total revenue. This is the actual money the business has earned for its owners or shareholders.

• Formula: Revenue – All Expenses.

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In short:

• Revenue is the total money collected.
• Gross Margin measures the profitability of the product itself.
• Profit measures the profitability of the entire business after everything else is paid.