Industries have many ways to break down how well or how poorly their business is doing. There are many ratios and calculations that are used in the effort to understand profits and losses. Gross margin is a way to show the profit of an individual product or entire company as a percentage. When a person explains, "the company's profit is 30 per cent," he is explaining the profit margin. Calculating the margin is relatively easy to do if you know two important numbers.
- Skill level:
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Gather the sales income for the product or company. This will be one of the two numbers you need. The other is the cost of goods sold.
Take the gross profit number, also know as the sales income, and subtract the cost of goods sold from that number. Use the following equation: gross profit - cost of goods sold = X.
After you have determined sales minus cost, you need to divide the number you came up with by the gross profit number: Use the following equation: X / gross profit = gross margin percentage
Turn the final number into percentage form. For example, an answer of .25 in step 2 would be 25 per cent. An answer of .34 in step 2 would be 34 per cent.
Tips and warnings
- One thing that you should remember is that this is a percentage of GROSS margin. It is not the percentage that you get to put in the bank as profit. You have taken out the cost of the products you are selling, but there are other expenses that must be paid that are not included in this equation.
- In other words, you might have made 30 per cent profit on a product, but that is just the product itself and is not including things like utilities, payroll, taxes or office supplies.
- If you want to see the percentage of what you actually get to keep after all expenses, then you would need to take net income after taxes and divide it by sales revenue, also known as gross profit.
- Use sales and cost numbers for an individual product to find out the percentage of a certain product.
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