Knowing how to calculate and interpret your gross profit percentage helps keep your profits high and your costs low. Learn how today.
Gross profit percentage: In plain English, this is the percentage of money you make from selling a good or service – after you subtract the cost of producing that good or service.
You want that percentage to be as high as it can reasonably be. The higher your gross profit percentage is, the healthier your business is and the more profit you’ll take home at the end of the day.
How Do You Calculate Gross Profit Percentage?
To calculate gross profit percentage you first have to calculate your gross profit for a period of time.
For example, let’s say you own a contracting business. In one month, you bring in total revenue of $110,000. You employ five employees who make an average of $3,000 a month with a burden rate of another $6,000. And for the jobs you worked on this month, you materials cost was $30,000, trade contractors were $20,000, and other indirect production costs came to $6,000.
To calculate your gross profit percentage for this month…
- First, calculate your cost of goods or services sold.
Cost of employees + labor burden + materials + trade contractors + other costs of production.
(5 x $3,000à $15,000) + $6,000 + $30,000 + $20,000 + $6000= $77,000
- Next, calculate your gross profit dollars.
Total revenue – cost of goods or services sold
$110,000 – $77,0000 = $33,000
- Then, you can calculate your gross profit percentage by converting dollars to a percentage.
Gross profit / total revenue x 100
$33,000 / $110,000 x 100 = 30%
In this example, your gross profit dollars are $33,000 and your gross profit percentage for the month is 30%.
What Does ‘Gross Profit Percentage’ Tell Me?
After you compute, and can see, your gross profit percentage, what does it mean?
To those outside of the business, your gross profit percentage is a statement to how efficient your business is during the production process.
Usually you’re going to want to average this for the year. To you, your annual gross profit percentage tells you what percent of your earnings you have available to cover:
- Company overhead
- Company taxes on profits and
- Your target net profit.
From our example above (remember it was for a single month) this means that of the $110,000 in revenue the business made a gross profit of $33,000. Is this a typical month? What are the projected revenues for the entire year? Will the projected income, combined with these kinds of gross profit percentages, yield enough to meet remaining company overhead and tax costs for the year, and still put a profit in the owner’s pocket? Let’s hope so…
Do You Have a Better Understanding of How Your Gross Profit is computed?
Whether it’s for a single job or for your company. Whether it’s for a month, or for a year, the more you learn about the critical numbers within your business, the more effectively you’ll be able to run it. Generally, a better understanding of your financial system leads to a more efficient business and higher profits.
If you’re ready to learn more about how you can use QuickBooks or Enterprise to manage your own in-house management accounting system (such as how to automatically calculate your gross profit percentage for certain time periods or how you can use these percentages to help with accurate job cost reporting), please take a few minutes to look through our full list of individual QuickBooks online accounting tutorials. Or, if you’re looking for a more comprehensive solution, check out our affordable CAMP subscription training series. If you’d like individual coaching, or have any questions, please give me a call or send me an e-mail today. I am here to help…