Profit percentage” usually (but not always) refers to “gross profit percentage” which, in turn refers to the “gross profit margin” expressed as a percentage. The formula for gross profit margin is “gross profit” divided by “revenue.”
“Revenue” generally refers to gross income or gross receipts. It is the amount received without accounting for any expenses whatsoever. If you sell two widgets at $50 each, it costs you $10 to produce each widget, you get taxed $5 per widget, your revenue will be $100 ($50×2). The costs associated with generating income is ignored.
“Gross profit” generally refers to revenue minus costs-of-goods-sold (COGS). COGS refers to the direct costs of producing goods. If you sell one gizmo, it costs you $20 in materials and $10 in employee wages to produce the gizmo, and $50 for a salesman to sell the gizmo, your COGS is $30 ($20+$10; the cost of the salesman is not included).
Consider this scenario: You sell two gidgets at $100 each, the materials to manufacture each gidget is $4, the per gidget rental costs of the manufacturing facility is $6, and it takes two hours to produce one gidget and you are paying an employee dedicated to gidget making $15 per hour, it costs $5 per gidget to move gidgets from the production facility to the store, renting the store costs $50, and at the store your salesperson is paid $50.
In the above scenario, your revenue is $200 ($100Ă—2). The direct cost for producing one gidget is $40 ($4 in materials plus $6 in allocated manufacturing plant rent plus $15/hrĂ—2hrs in labor). The costs for transport, renting the store, and labor for salesperson are not direct costs of producing the gidgets, and therefore ignored. Thus, your COGS is $80 ($40Ă—2).
If revenue is $200 and COGS is $80, then gross profit is $120 ($200-$80). Thus, your gross profit margin is 0.6 ($120/$200). Hence, your gross profit percentage is 60% (0.6Ă—100).
