The gross profit margin calculation is one that's used in all business accounts and entered into the profit and loss account.
It is sometimes called the gross margin and entered as an absolute number or a percentage so the % is the gross profit percentage.
How To Calculate Gross Profit
Calculating gross profit is a simple calculation in its rawest form and is:
Sales/ turnover/ takings less
Direct cost of sales
You have sales of £1000 and the direct cost of sale is £250 so your gross profit is £1000 less £250 equals £750.
The sales value is always net of vat and discount and in the profit and loss account are sales made during the period the statement is made whether or not you have received payment for the sales made (although VAT cash accounting is slightly different).
The cost of sales are those costs that are directly related to the actual sale made and are normally made up of the purchase price of the product excluding any discounts and any transportation costs incurred to bring the products to your business (not to the customers business premises.
Calculating the Gross Profit Percentage
Rather like the calculation above calculating the percentage is the ratio of the gross profit number itself divided by the sales figure expressed as a percentage.
Example : taking the values outlined above your gross profit percentage would be £750 profit divided by £1000 sales giving 0.75 expressed as a percentage is 75%
Other Gross Profit Expressions
You can also express gross profit as gross margin, gross margins as they are the same thing.
Industry Average Gross Profits
Of course the margin varies widely by industry sector so only compare your business with another related business. Here are a few averages for the sectors shown:
- Airlines 5.6%
- Manufacturing 34.1%
- Software 90%
- Restaurants 47%
- Hotels 9.6%
- Retailers 11.4%