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Gross profit, margin, markup, net profit, overheads, revenue, turnover. There’s a lot of business terminology that we regularly hear, but aren’t always sure what they refer to.
Many people confuse gross and net profit and other business terms, but it’s important to know exactly what you’re talking about especially when it comes to interviews. If you’re going for a sales or managerial role, it is particularly key that you get your facts, figures and terminology right. It could be a bit embarrassing if you don’t.
The good news is, we’re here to clarify exactly what the most common business terms mean. Whether you’re talking about a global corporation or a small business, this terminology is relevant. Discover the basics that you need to remember in our glossary of business terms below.
The total income from the sale of goods or services is referred to as revenue.
Turnover is most often used to mean the same as revenue. It is the amount of money taken by a business in a set period and is often measured annually.
Gross profit is a company’s total revenue (or sales) minus the costs associated with making and selling its products or providing its services. Put simply, it is the difference in value between the revenue generated by a product or service and the cost of producing it. It does not include overhead costs such as rent, payroll or utilities. Gross profit is the simplest type of profit for a business to calculate.
NOTE: A common misconception is that gross profit is the amount of money brought in by a company for its products or services.
Net profit is a company’s total earnings minus ALL of its expenses. These include the costs of making and selling products or services as well as administration, legal and accounting fees, sales commissions etc. Net profit is typically measured quarterly or annually.
In-line with the definitions above, gross profit margin is the profit made before any non-product expenses have been deducted from the company revenue. We calculate gross profit margin by dividing gross profit by total revenue and multiplying this figure by 100. This will give a percentage of income retained as profit after accounting for the cost of goods.
Net profit margin is therefore the profit made after all the business expenses are deducted from the revenue. It is the bottom line. We calculate net profit margin by dividing net profit by total revenue and multiplying this figure by 100. This will give a percentage of income retained as profit after accounting for all expenses.
The amount added to the cost price of goods is called the markup. It covers overheads and profit.
A profit share scheme is when the profits a business makes is put into one pot, divided up amongst employees, and paid as one lump sum, often as a percentage of a salary. How much or how little a worker will receive depends entirely on the success of the business as a whole and their individual impact.
Overheads are the costs required to run a business. They include things like accounting fees, insurance, phone bills, rent and utilities. They are basically any expenses that do not directly generate revenue.
So, there you have it. Now that you know your business terminology, you can talk about it with confidence and impress potential employers with your knowledge and figures.
B2B stands for business to business and means that one businesses is selling products to another business (as opposed to a consumer which would be B2C).
Market share is the portion or percentage of a market that one company controls.
SMEs stands for small and medium-sized enterprises. A small business is usually considered to have less than 50 employees and a medium has 50-250 employees.
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