Gross profit margin is a measurement scale used to examine a company's financial health and model of business by revealing the amount of capital remaining from sales after subtracting the cost of goods that have been sold. This metric is frequently expressed as a sales percentage and is also called the gross margin ratio.
There are various layers of profitability that analysts keep on their radars to analyze a given company’s performance. This includes gross profit, the net profit, and of course, the net income.
Each of these provides useful data about the profitability of a company. Operating profit (net profit or in this case, net profit margin) reveals the amount of remaining revenue after deducting the general costs, administrative costs and selling.
Gross profit, the first stage of profitability shows analysts how good a company is at manufacturing a product or providing a given service relative to its competitors. Gross profit margin, computed as gross profit divided by revenue, enables analysts to relate business models in a quantifiable scale.
Without a proper gross margin, a company cannot pay for its general expenses. In essence, a company's gross profit margin should be okay unless there have been changes made in its business model. For instance, when companies automate certain supply chain procedures, the starting investment may be higher; however, the price of products sold is much lower relatively due to low labor costs.
Regulation changes or even changes in a company's price strategy may also be a driving factor in gross margin. If a company sells its goods at a premium price in the market while keeping all other things constant/equal, it achieves a higher gross margin. The problem is that if the price is quite too high, fewer customers may buy the goods.
The Profit Margin Calculator computes the profit margin, considering you know its price and your target profit margin percentage. That's not all, you can also calculate any of the primary variables used in sales processes.
These variables include the prices of products sold (how much you being a retailer, pay to the wholes seller for the products you sell to the end user), margin of profit, revenue (how much you charge for goods) and last but not least, the profit you make from any of the other variables.
Speaking generally, your profit margin decides how efficient your company is. If the profit margin for your company is low, it puts you on a very slippery slope and any change that occurs for the worse might end up in big trouble for your company. Higher profit margins imply that there's a lot of space for errors and tough luck.
Our Gross Margin Calculator calculates the margin for you to assist you in your business. However, it can also be calculated manually but it’s an exhausting task. Still, we have outlined the procedure to calculate the margin manually to give you a perspective on how it’s done.
$20.$60).$60 - $20 = $40$40 / $60 = 0.60.6 * 100 = 60%.As you can see, margin is a rather pretty simple percentage calculation however, in contrast to markup, it is based on revenue instead of Cost of Goods Sold.
The gross profit percentage formula or the equation for gross margin percentage is:
gross margin = 100 * profit / revenue (when represented in percentages).
On the other hand, the profit formula is:
profit = revenue - costs, so a substitute margin equation is: margin = 100 * (revenue - costs) / revenue.
Now that you have found out how to calculate gross profit margin here is the equation for the revenue:
revenue = 100 * profit / margin
Lastly, to estimate how much you can pay for a product, given your margin and revenue is through the following formula:
costs = revenue - margin * revenue / 100
All the terminologies including the margin, profit margin, gross margin, profit margin have very thin lines of differences and they are used in somewhat different contexts. For instance, prices do not necessarily include expenses other than the costs of goods sold.
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If you are running a business or a start-up, you would definitely find our VAT calculator and sales tax calculator useful too. Feel free to check them out.