How to Calculate Gross Profit Margin and Net Profit Margin
Calculate total sales., Calculate the cost of goods sold (COGS)., Determine Gross Profit., Calculate Gross Profit Margin.
Step-by-Step Guide
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Step 1: Calculate total sales.
Add up all the money made from the sale of goods and services sold by your business.
This is the total sales.
You don't necessarily have to calculate your revenue for your business as a whole
- depending on your specific needs, you may want to find the revenue for individual departments of your business or for individual products.Total sales can be calculated as number of units sold multiplied by selling price per unit.
Example- a company sells 100 units of its product as $50 a piece.
So total sales would be $50*100 = $5000. -
Step 2: Calculate the cost of goods sold (COGS).
Add up the expenses associated with selling the products to generate a value for the cost of goods sold Let's say that COGS is $25 a piece, so total COGS would be $25*100 = $2500. , Subtract the total cost of goods sold from the total sales calculated to determine the gross profit for the business for this period.
The number you get is a representation of how much money you make solely from selling your products
- it's from this pool of money that you'll pay the business' taxes, salaries etc.
Gross profit should be positive
- if it isn't, you're losing money by selling your products at their current price.
For the above example gross profit would be $5000- $2500 = $2500. , It is the ratio of Gross profit / Total sales, which in the above example would be equal to $2500 / $5000 = 50%. -
Step 3: Determine Gross Profit.
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Step 4: Calculate Gross Profit Margin.
Detailed Guide
Add up all the money made from the sale of goods and services sold by your business.
This is the total sales.
You don't necessarily have to calculate your revenue for your business as a whole
- depending on your specific needs, you may want to find the revenue for individual departments of your business or for individual products.Total sales can be calculated as number of units sold multiplied by selling price per unit.
Example- a company sells 100 units of its product as $50 a piece.
So total sales would be $50*100 = $5000.
Add up the expenses associated with selling the products to generate a value for the cost of goods sold Let's say that COGS is $25 a piece, so total COGS would be $25*100 = $2500. , Subtract the total cost of goods sold from the total sales calculated to determine the gross profit for the business for this period.
The number you get is a representation of how much money you make solely from selling your products
- it's from this pool of money that you'll pay the business' taxes, salaries etc.
Gross profit should be positive
- if it isn't, you're losing money by selling your products at their current price.
For the above example gross profit would be $5000- $2500 = $2500. , It is the ratio of Gross profit / Total sales, which in the above example would be equal to $2500 / $5000 = 50%.
About the Author
Scott Gibson
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