Gross profit margin is one of the basics in business.
But just because it’s basic doesn’t mean you shouldn’t dedicate time to it. In fact, in most cases the most successful businesses are the ones who nail the basics.
It is one of our seven key metrics for optimising your business.
Successful businesses understand what their gross profit margin is and dedicate time to tracking it.
Especially with the upswing in economic activity recently, it is key to make sure you are tracking your profit metrics.
Gross profit margin is profit per good or service you provide
Your gross profit margin tells you how effective the operations side of your business is at making money. It excludes overheads, depreciation and amortization.
Gross profit is defined as the difference between your revenue and your costs of goods sold.
Gross profit margin is your gross profit expressed as a percentage of your overall revenue.
In other words, it is your gross profit divided by your revenue multiplied by 100.
For example, if a business called Smiths Eats (a hypothetical example) had a revenue of $100,000 and a cost of goods sold as $40,000, its gross profit would be $60,000.
Expressed as gross profit margin, Smiths Eats would have gross profit margin of 60%.
To find your gross profit margin, you need to have a clear picture of your revenue and cost of goods sold.
Gross profit margin is different to net profit margin
Understanding the difference between gross profit margin and net profit margin is key to understanding gross profit margin.
Your net profit margin is your gross profit after overheads, expenses, depreciation and amortization, interest and taxes expressed as a percentage of revenue.
Your gross profit margin is your profit before these factors are taken into account.
Your net profit margin might be seen more as your ‘overall’ profit, whereas gross profit margin is related more to productivity or appropriate pricing in most cases.
How often should I track it?
So now you’ve gotten all your bookkeeping and numbers in your business correct and determined your gross profit margin.
But there’s a problem: it’s going to change every week as your business performance or market conditions vary.
You’re a busy business owner and you don’t have time to sit down every day (nor should you) to review your gross profit margin, so you have to determine how often to track it.
We recommend reviewing your gross profit margin at least once a quarter.
You can do this as part of your quarterly management meetings.
The key really is: make sure you are setting time to track it.
Many business owners either don’t know how to calculate their gross profit margin, don’t have their bookkeeping correct or simply do not set time to track it, and they pay the price.
If you would like help with your gross profit margin, please get in touch with us below for a no obligations phone call.I’m interested in business help