Understanding gross profit margin
While gross profit is expressed in dollars, the gross profit margin is expressed as a percentage. It’s important because it can be used to track trends in profitability.
Gross profit margin is the key measure of your businesses’ profitability. You can set this figure out as either:
- Overall gross profit margin – shows overall business performance.
- Profit margin for each item – calculate the margin for each product line, item or activity, which shows how profitable that particular business activity is.
How to calculate your gross profit margin
Step 1: Calculate your gross profit
Your gross profit is your sales, less the cost of goods sold.
Sales – Cost of Goods Sold (CoGS) = Gross Profit
For this calculation we define ‘Direct cost of sales’ to include the material and labour involved in preparing your item for sale. While ‘Overheads’ include costs that cannot be directly attributable to a sale but are incurred to keep the business running, e.g. accounting costs, advertising, insurance, rates.
Step 2: Calculate your gross profit margin
Your gross profit margin is your gross profit, divided by sales, multiplied by 100.
Gross Profit ÷ Sales x 100
Example
If your gross profit for the year is $27,000 and your total sales for the year is $90,000 your gross profit margin is 30.0%.
27,000 ÷ 90,000 x 100 = 30.0
How to prepare your financial statements
Learn about the two main financial statements for your business: the Balance Sheet and the Profit and Loss Statement, and how to calculate some key finance ratios like profitability, business efficiency, or business liquidity ratios.
Contact an ANZ Business Specialist
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