Every business owner needs to know how to calculate their gross profit margin (%) and net profit margin (%).
After all, it’s what shows you how much profit you’re making!
As a business owner or bookkeeper, the most important numbers you’ll ever need to know may very well be your profit margins.
There are two kinds of profit margins, gross profit margin, and net profit margin.
Gross Profit Margin
Gross Profit Margin, a critical financial metric, is the percentage of a company’s revenue they get to keep as “gross profit” after subtracting the direct costs required to produce the goods or services they sell, (also known as the Cost of Goods Sold (COGS).)
It is a measure of operational efficiency because the higher a company’s gross profit margin, the more they earn on each dollar of sales. Those earnings can be utilized to pay other costs or satisfy debt obligations. The Gross Profit Margin is often synonymous with Gross Margin Ratio.
Net Profit Margin
Net Profit Margin is the percentage of net income or profit generated from a company’s total revenue. It is a critical financial metric that indicates how efficiently a company converts its sales into profits. It illustrates how much money (as a %) you retain as profit after you pay all of your costs of production, company overhead expense, interest, and taxes. A higher net profit margin reflects better profitability, while a lower margin may suggest challenges in cost management or pricing strategies.
How Do You Calculate Profit Margin?
It depends on whether you’re trying to calculate gross profit margin or net profit margin. Both tell you important (but different) information about the overall financial health of your business. So let’s look at them one at a time.
How To Calculate Gross Profit Margin
- Gross Profit ($) = Total Revenue – Cost of Goods or Services Sold
- Gross Profit Margin (%) = Gross Profit / Total Revenue x 100 (yields a percentage)
Gross Profit and Gross Profit Margin Calculation: An Example
You own a contracting business and in one week…
- Your total revenue = $10,000
- Cost of Services Sold: Two employees paid $1,600 gross payroll + another $1,000 for burden costs + $3,400 for construction materials = $6,000 ‘production cost.’
To compute gross profit for this example:
$10,000 gross revenue – $6,000 production cost = $4,000. So, your gross profit amount for the week is $4,000.
To calculate your gross profit margin percentage:
$4,000 / $10,000 x 100 = 40%. So, your gross profit margin for the week is 40%.
How to Calculate Net Profit Margin
- Net Profit ($) = Gross Profit (as computed above) less Company Overhead, Interest, and Taxes (also known as Net Income or “the bottom line” in financial statements).
- Net Profit Margin (%) = Gross Profit less Company Overhead, Interest, and Taxes / Total Revenue x 100
Net Profit and Net Profit Margin Calculation: An Example
Let’s say you own the same contracting business as the first example, but instead of just subtracting the cost of goods and services sold, this time you also include all of your company overhead expenses, interest, and taxes. We determine that the additional cost is $3,000.
To compute net profit for this example:
$10,000 Revenue – $6,000 production costs – $3,000 company overhead, interest, and taxes = $1,000. So your Net Profit amount for the week is $1,000.
To calculate your net profit margin percentage:
$1,000 Net Profit / $10,000 Revenue x 100 = 10%. So your Net Profit margin for the week is 10%.
Or you can look at it this way, for every $100 you earn, you will keep a net profit of 10% or $10.
Are You Clearer on How To Calculate GROSS and NET Profit Margins?
I hope this helped.
Using QuickBooks To Automatically Calculate Gross and Net Profit Margins
Of course, the fastest and easiest way to quickly see both your Gross and Net Profit dollars and percentages is to design your QuickBooks accounting system to automatically display those numbers on your Profit & Loss reports – for your company totals, or job by job.
QuickBooks or Enterprise has the power and flexibility to show income for each job, accumulate costs for each job, calculate gross profit for each job, and display both gross and net profit dollars and percentages for your entire business.
When you use your accounting software to help you see, and use, these critical numbers, you continually improve your results. And, as you improve your results, you maximize your profits.
My goal is to help business owners (like you) learn how to use QuickBooks and Enterprise accounting software as “the tool of choice for the job at hand!”
If this information was helpful, it’s only one small example of how to use your numbers to boost your profits! Take a few minutes to check out this extensive (and affordable!) online QuickBooks subscription training series.
Alternatively, if you’d like individual coaching, or have any questions, please give us a call or send an e-mail today.
A final question: Got employees?
Ever wonder whether YOU are earning enough – by all the costs for your employees in your bids?
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