Knowing how to calculate and interpret your Gross Profit percentage (margin) helps keep your profits high and your costs low. Learn how today…
Gross Profit percentage: In plain English, this shows the percentage of your earnings AFTER you subtract the cost of “producing” those products or services. However, that percentage is BEFORE you pay for other company costs and taxes.
You want that percentage to be as high as it can reasonably be. The higher your Gross Profit percentage, the healthier your business and the more profit you’ll take home at the end of the day.
How Do You Calculate Gross Profit Percentage?
To determine your Gross Profit percentage, start by calculating your Gross Profit DOLLARS earned for a specific time period. For example, let’s say you own a contracting business. In one month, you bring in Total Revenue of $110,000.
But there are some related costs.
- Let’s say that you have five employees who make an average of $3,000 a month, and they also have a total burden rate of another $6,000.
- Materials cost was $30,000
- Trade contractors were $20,000, and
- Other indirect production costs came to $6,000 for jobs undertaken this month.
Example Gross Profit Calculation
To calculate your Gross Profit percentage for this month…
1. First, add up your costs of products or services sold.
Cost of employees + labor burden + materials + trade contractors + other costs of production.
(5 x $3,000 = $15,000) + $6,000 + $30,000 + $20,000 + $6000= $77,000 of total cost
2. Next, calculate your Gross Profit dollars.
Total Revenue minus the cost of products or services sold.
$110,000 – $77,0000 = $33,000 Gross Profit (in dollars)
3. Finally, compute your Gross Profit percentage by converting dollars to a percentage. Here’s the calculation:
Gross Profit divided by Total Revenue x 100:
$33,000 / $110,000 x 100 = 30% Gross Profit (often called “margin”)
So, for 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?
Q. After you compute it and can see it, what does your Gross Profit percentage really mean?
A. Your annual Gross Profit percentage (and dollars) tells you what portion of your earnings are available to cover:
- Overhead for your Company
- Company taxes on profits so that
- You can see your NET Profit (commonly known as your “bottom line”).
From our example above, of the $110,000 in revenue, the business made a Gross Profit of $33,000 (33%) for one month. As you look at this one-month result, you’ll also want to ask questions such as:
- Was this a typical month?
- What are our projected revenues for the entire year?
- Will the projected annual revenues, and similar Gross Profit percentages, yield enough Gross Profit to pay the remaining company overhead and tax costs for the year? And still put a profit in my pocket? (Let’s hope so!)
Gross Profit Percentage as an “Efficiency Indicator”
Most people want to see Gross Profit results in both dollars and percentages for the year. Why? Dollars are important, but the percentage provides an extra perspective…
For you (and to anyone outside of your business – such as your banker), your Gross Profit percentage represents “efficiency.” I.e., How efficient is your business as it produces products or services?
As an example, imagine that you’re looking at two companies:
- The Gross Profit percentage for Company A is just 5% of revenue.
- Company B’s Gross Profit percentage is 45% of revenue.
Which company was the most efficient in delivering its services or products? Which company would you want to own? (I’m projecting that you said “Company B,” right?)
Do You Have a Better Understanding of How Your Gross Profit Percentage is Computed – And Why It’s So Important?
Whether it’s for a single job – or your entire company. Whether it’s for a month – or a year – the more you learn about the critical numbers within your business, the more effectively you’ll be able to run it!
A deeper understanding of your “business pulse” numbers helps you:
- Understand past results
- Focus on your current results, and
- Design operations to achieve your future success.
Use Gross Profit percentages and dollars – the right numbers – to create a more efficient business to achieve the profits you deserve…
To Learn More About How Job-Costing Can Improve Gross Profit Percentages…
- Ready to learn more about how you can use QuickBooks or Enterprise to manage your own in-house management accounting system?
- Want to see how QuickBooks reports will automatically calculate your Gross Profit percentages?
- Looking to find out how you can use job costing to improve your Gross Profit results?
We love teaching and coaching, so if you’re ready to learn, we’re here for you.
Please take a few minutes to check out our affordable Job-Cost Training series.
You can sign up for any of our workshops or training tutorials and learn what you need to know 24/7. If you have any questions you’d like answered before moving forward, please send us an email or call, and we’ll be happy to spend more time to learn more about you and your business.
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