When it comes to managing your business, everything can quickly get so complicated when you start to dive into all the dynamic aspects you need to be thinking about. If only business life was as simple as setting prices, making sales, and paying the money into your bank account. In reality, you need to be focused on paying your taxes, ensuring your shareholders are paid their dividends, insurances are covered, and that your business is valued properly.
One of these potentially complicated figures you may have come across is known as your ‘gross profit percentage,’ and if you’re struggling to work it out, don’t worry, we’ve got you covered. This is exactly what we’re going to be focusing on today.
What is the Gross Profit Percentage?
To cut a long story short, the gross profit percentage is a figure that shows you how much money, usually to the dollar, you have left over when you’re looking at your cost of goods sold figure (COGS). The COGS figure usually refers to how much you’re buying a product into your business or how much it costs to produce, including raw materials and labor costs.
As you can see, this is a great figure that ensures you’re able to run a business profitably. As an example, let’s say that you’re running a factory that makes pencils. You buy in all the materials to make the pencils, factor in staff costs, electricity to run the machines, and so on, and you can sell a pencil for $1. An expensive pencil, but hey, market forces.
Let’s say it takes $10,000 to make 20,000 pencils, and you sell them all, you have $20,000. Minus the COGS, you have made $10,000 gross profit. To work out the Gross Profit Percentage Formula, you need to do the following equation:
Gross Profit / Total Sales x 100%, and that’s Gross Profit being defined as total sales – the cost of goods sold.
In this example, this would be;
20,000 / 10,000 x 100%, which equals 50%. So your Gross Profit Percentage is 50%, which is really good. Of course, your own figures may not be so clean-cut, and there are going to be a lot more that goes into your costs, but you should be able to use the formula to easily figure out exactly what your own gross profit percentage is.
As a more detailed example, let’s imagine a company has made $250,000 in net sales and has an expenses page that looks something like this;
Labor – $60,000
Raw Materials – $35,000
Rent – $7500
Interest Expense – $9000
Depreciation Expensive – $22000
Tax – $4500
You would need to work out the COGS, which is labor, plus materials, plus rent, which totals $102,500, and now work out the gross profit, which would be $147,500. Now put that into the formula above ($147,500 / $250,000 * 100%), and you get a gross profit percentage of 59%.
While it may look complicated, once you know the formula’s ins and outs, calculating the gross profit percentage is easier than one, two, three. With a bit of practice, you’ll be able to work it out in no time at all, every time!