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!
How much profit your business is making might be the most important number you’ll ever want to know as a business owner.
In accounting terms, this is known as your profit margin. There are two kinds of profit margins, gross profit margin and net profit margin.
- Gross Profit Margin is the measurement of a company’s efficiency during its “income production” process. It’s the amount that’s left after paying the direct and indirect costs required to produce the goods or create the services you sell.
- Net Profit Margin is the measurement of profit you make for every $1 you earn in revenue. In other words, it illustrates how much money you retain (per $1 of revenue) after you pay all of your costs of production, company overhead expenses, and taxes.
So, 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 information about the overall financial health of your business. So let’s look at them one at a time.
Calculating Gross Profit Margin
- Gross Profit = Total Revenue – Cost of Goods or Services Sold
- Gross Profit Margin Percentage = Gross Profit / Total Revenue x 100 (yields a percentage)
An Example of Gross Profit and Gross Profit Margin Calculations:
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
To compute gross profit for this example:
$10,000 gross revenue – $6,000 production cost = $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%.
Calculating Net Profit Margin
- Net Profit = Gross Profit less Company Overhead and Taxes (also known as Net Income or “the bottom line” in financial statements).
- Net Profit Margin = Gross Profit less Company Overhead and Taxes / Total Revenue x 100
An Example of Net Profit & Net Profit Margin Calculations:
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 and taxes. We determine that the additional cost is $3,000.…
To compute net profit for this example:
$10,000 – $6,000 – $3,000 = $1,000
To calculate your net profit margin percentage:
$1,000 / $10,000 x 100 = 10%
So, your net profit margin for the week is 10%. Or you can look at it this way, for every $100 dollars 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. Of course the fastest and easiest way to calculate and 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.
QuickBooks or Enterprise has the power and flexibility to accumulate costs for each job, calculate gross profit for each job, and display both gross and net profit dollars and percentages for your business.
When you use your accounting software to help you see, and use, these critical numbers, you can continually improve your results. As you improve your results you can increase your profits to your highest potential.
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, please take a few minutes to check out our affordable online QuickBooks subscription training series.
Alternatively, if you’d like individual coaching, or have any questions, please give me a call or send me an e-mail today. I am here to help…
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