GCSE-ready- Home
- Lessons
- GCSE & IGCSE Business
- Gross and net profit margins
Gross and net profit margins
🎬 The doodle video for this lesson is coming soon. Subscribe on YouTube to see it first.
Profit tells you how much a business made. Profit margins tell you how good it is at turning sales into profit.
Gross and net profit
Gross profit = sales revenue − cost of sales
Cost of sales is the direct cost of the goods sold, such as stock bought.
Net profit = gross profit − other operating expenses and interest
Other expenses include rent, salaries and advertising.
Cost of sales is the direct cost of the goods sold, such as stock bought.
Net profit = gross profit − other operating expenses and interest
Other expenses include rent, salaries and advertising.
Margins
Gross profit margin (%) = gross profit ÷ sales revenue × 100
Net profit margin (%) = net profit ÷ sales revenue × 100
A higher margin means more of each £1 of sales is kept as profit.
Net profit margin (%) = net profit ÷ sales revenue × 100
A higher margin means more of each £1 of sales is kept as profit.
Interpreting margins
Compare margins with previous years and with competitors.
A falling gross margin may mean cost of sales is rising or prices are being cut.
A big gap between gross and net margin means high other expenses.
A falling gross margin may mean cost of sales is rising or prices are being cut.
A big gap between gross and net margin means high other expenses.
Revenue £50 000, cost of sales £20 000, other expenses and interest £18 000. Find the net profit margin.
- Gross profit = 50 000 − 20 000 = £30 000
- Net profit = 30 000 − 18 000 = £12 000
- Net margin = 12 000 ÷ 50 000 × 100
Answer: 24%
Gross profit = revenue − cost of sales. Net profit = gross profit − other operating expenses and interest. Margin = profit ÷ revenue × 100. Compare margins over time and with rivals.
Check you have got it
Answer 7 quick questions with instant marking. If you get one wrong, GCSE-ready shows you why and gives you another go. It is free, and you do not need an account.