Profit and Profit Margin??

NorthernRed

Can anyone help me please i'm starting in business with a friend and today we were talking about profit and profit margin. I have always worked on profit margin being (profit/selling price)*100 to give the profit magin as a percentage. I want to use this to work out ie if we do £1000 of sales at 16.2% profit margin we make £162 profit. But my partner disagrees, his example was if we buy goods at £100 and sell it for £150 then that is a profit margin of 50%, whereas i say it is a profit margin of 33.3%. To be honest i know he is wrong but just can't seam to find the right termanology to satifsy him. Any ideas

Many Thanks

NR

Pennywise

The mark up is 50%
Profit margin is 33.3%
You are right!

NorthernRed

Thanks for the reply i thought i was right, but how do i explain that we need to work on profit margin and not mark up. I just don't know how to word it right.

Many Thanks

NR

jackomdj

NR,

You are right on the terminology, however if you explain to him that he needs a markup of x to get sufficient sales to get a bottom line Net Profit of y and a markup of x is the same as a gross margin % of z he may get it....

Sales £000
Cost of Sales (£000)
Gross Profit £000
Gross Profit %
Other Direct Costs (£000)
Indirect Costs (£000)
Net Profit £000
Net Profit %

ManAtHome

Could work either way - you need to use margins in relation to turnover, mark-up in relation to stock investment. You buy at £100 and sell at £150, profit £50 which is 33% of turnover, 50% of stock investment.

NorthernRed

Thanks, great replies. I'm now sure i can explain it to him, £150 is our turnover, £50 is our profit as a percentage of our turnover that is 33%. Hopefully that will make sense to him.

Many Thanks

NR

richie_greenuk

Its important that you get this right from the beginning as this acts as the backbone of any business - the bottom line keeps our head above water!