How to define gross profit percentage

Written by claudia newcorn
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How to define gross profit percentage
Calculating gross profit percentage ($ Symbol and bar chart image by rolffimages from Fotolia.com)

The gross profit percentage is one of several key measurements a company uses in evaluating its financial performance. It helps a company to see what percentage of its earning after costs (for products and/or services) is profit. A higher gross profit percentage is generally preferred as it provides the company with financial resources to pay for research, product development, and other costs associated with running and growing a business. A company that has little gross profit has limited resources.

Skill level:
Easy

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Instructions

  1. 1

    Calculate gross profit by taking total gross or sales revenue, minus total sales costs or cost of goods. If you sell your product for £6 and it costs you £2 to manufacture (known as cost of goods) or £2 to buy wholesale, your gross profit is £3.

  2. 2

    Divide your gross profit by your gross sales revenue to get your gross profit percentage. Using the example in Step 2, you would divide your gross profit of £3 by your revenue of £6, for a 60 per cent gross profit.

  3. 3

    Note that the gross profit percentage is profit before operating expenses, such as paying salaries and turning on the lights.

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