Different Uses of “Margin” in Financial Statements - dummies

Different Uses of “Margin” in Financial Statements

You may come across several different uses of the term margin in financial statements and elsewhere: It may refer to gross margin, to true margin, or to operating earnings. Gross margin, also called gross profit, equals sales revenue minus the cost of goods sold expense.

Gross margin does not reflect other variable operating expenses that are deducted from sales revenue. In contrast, the term margin refers to sales revenue less all variable expenses.

Some people use the term contribution margin instead of just margin to stress that margin contributes toward the recovery of fixed expenses (and to profit after fixed expenses are covered). However, the prefix contribution is not really necessary. Why use two words when one will do?

Businesses that sell products report gross margin in their external income statements. However, they do not disclose their variable and fixed operating expenses. They report expenses according to an object of expenditure basis, such as “marketing, administrative, and general expenses.”

The broad expense categories reported in external income statements include variable and fixed cost components. Therefore, the margin of a business (sales revenue after all variable expenses but before fixed expenses) is not reported in its external income statement. Managers carefully guard information about margins. They don’t want competitors to know the margins of their business.

Further complicating the issue, unfortunately, is that newspaper reporters frequently use the term margin when referring to operating earnings. Strictly speaking, this usage is not correct. Margin equals profit after all variable expenses are deducted from sales revenue and before fixed expenses are deducted.