Gross Profit Margin
The Gross Profit Margin (also known as Gross Profit Percentage or Gross Margin) is a very important calculation, particularly in retail or manufacturing entities. It measures sales revenue less cost of sales and expresses this as a Margin; that is, the profit between the cost producing or purchasing an item of inventory and its eventual sales price. It tells us what Margin of every dollar of sales revenue remains after the cost of purchasing or manufacturing the sold inventory.
Note: You will find that within service firms, 'Cost of Sales' are generally not inventory costs, but instead could be the salary of the staff member providing the service to the customer or other job or project costs for that particular customer.
It is an important indicator because it tells us how much funds are left from sales revenue to pay all other remaining expenses while also leaving enough for a satisfactory net profit. If a business cannot generate a large enough gross profit from its sales, then there is pressure on the bottom line when financial reports are generated, and ultimately the viability of the business.
If you have a Gross Profit Margin of 65%, then this means that 65% of your sales revenue is left for the remaining expenses and net profit. Further, it would mean 35% of your final sales price was consumed by the costs of manufacturing or purchasing the sold inventory.
Gross Profit Margin Formula
(Sales Revenue - Cost of Sales) / Sales Revenue
Gross Profit Margin Calculator
The calculator asks for:
Sales Revenue, which is in the Income Statement.
Cost of Sales (COGS), which is also found in the Income Statement.
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