When you want to calculate gross profit or more importantly calculate gross profit margin on an item you are selling or for your business as a whole, you only need to use a few simple formulas for these gross profit calculations.
Many businesses or start ups use the wrong calculations to begin with or they don’t use them at all and wonder why they end up not getting ahead, especially if the industry they are in have tight margins coupled with high running costs which is becoming more and more prominent these days.
You could start with applying this formula to the products you sell and then use it on your business as a whole to see how profitable it is.
This would mean taking into consideration all of that products or your business associated costs (fixed and varied costs), and including this into your formula.
Also you could use these to gauge if your business is becoming more efficient as a whole, month to month and year after year, as it is a true indicator of how much of your sales revenue is profit.
Using gross profit margin is a good guide, for you to see in basic terms, how your business is travelling and to see if the products you are selling are a profitable choice.
So it is a reflection of how much money you are actually making by selling your products.
Now I’ll start with the base formula to calculate gross profit.
Calculate Gross Profit :
Here above is the basic formula for you to calculate gross profit on items you sell.
Start with this calculation first as you will use this total in the main gross profit margin formula.
As a simple example, you buy a product for $30 and sell it to a customer for $50.
Gross Profit = $50 – $30
Gross Profit = $20
*Remember that the $20 Total Cost of Product I am using here doesn’t take into account the cost of running your business added to it, you will have to work this out and add it to this cost total
Now we get onto your gross profit margin percentage.
Calculate Gross Profit Margin :
Here above is the basic formula for you to calculate gross profit margin on items you sell.
This will give you a two decimal point number, so multiply the answer by 100 to get your gross profit margin as a percentage.
Carrying on with the simple example from above.
Gross Profit Margin = $20 / $50
Gross Profit Margin = 0.4 x 100% = 40%
The higher your business / product gross profit margin, the better for you, as you are retaining more dollars in your business.
A very low business / product gross profit margin means you are unable to control your costs or you have set your prices too low.
Businesses often have a gross profit margin that they have to maintain to be equitable and keep their doors open and they use this when working out the best products to sell and also how they run their business.
So if you are looking at analysing your business as a whole to calculate gross profit margin it will take a fair bit of time to set up with the correct data.
But once you have set your perimeters, and know where your business costs / profits are coming from, the fun part will be seeing your problem areas, making a few changes, and seeing your gross profit margin start to climb and you enjoying a bit more cash flow.
And everyone wants more cash flow don’t they?