Knowing how to calculate and interpret your Gross Profit percentage (margin) helps keep your profits high and your costs low. Learn how today…
What is Gross Profit Percentage?
Gross Profit percentage is a measure of profitability that shows your percentage of 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?
The steps to calculate your Gross Profit percentage are:
- Calculate your total revenue (the amount you received).
- Calculate your cost of goods sold (the total amount it cost to create your sales revenues, including labor costs.
- Subtract your cost of goods sold from your sales revenue to get your Gross Profit.
- Divide your Gross Profit by your sales revenue and multiply the result by 100 to get your Gross Profit percentage.
Let’s look at those steps in more detail using simpler language.
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, and last month, you brought 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.
Gross Profit Calculation Example
To calculate your Gross Profit percentage for this month…
- Start with your total revenue, in this case, $110,000
- Then, 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
- 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)
- Finally, compute your Gross Profit percentage by converting Gross Profit dollars into 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 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 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?)
Why Calculating Gross Profit Percentage is 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 Gross Profit percentage, your Gross Profit dollars, and other “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…
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 learning more about you and your business.
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