Profitability Measures
Cash is king! But profit generates excess cash. But what is Gross Profit Margin? Understanding your underlying profitability is critical to a healthy and sustainable small business. But so many more insights into underlying profitability and costs can be gleaned than in your profit and loss statement.
Gross Profit Margin
Your Gross Margin is highly important for many businesses where there are direct costs of goods or labour that have to be incurred with the sale of a product or service. The cost of sale could be a stock item for a physical product, or a unit of labour or process if a service item. Your cost of sale can be made up of multiple physical goods or units of labour.
What does it mean?
Please note. Gross profits or and gross profit margins are different. Gross profits are the difference between your sale price achieved, and the costs of all goods and services that make up that sale. It would not normally include things such as lighting and telephone type expenses. Your gross margin is simply the gross profit amounts, divided by your sales amounts. Check your gross profit margin now with Jazoodle
How we derive GPM?
Definition used:
Total Gross Profit (amount) Divided by:
Total Sales (amount)
eg: Sales $100,000, Gross Profit $56,000
GPM equals 16,000 / 100,000 [times 100] = 56%
How Can I Improve My Gross Profit Margins?
If your margins are lower than you would like, there are a number of things you can assess to help improve them. As always, please work with your accountant or business advisor for individual advice for your business. Gross Profit Margins are affected by the following:
- Sales revenues.
- Cost of goods (direct costs)
thus falling margins could indicate that:
- You are relying on discounting too heavily (unit revenues are falling)
- You have fixed input costs but your sales levels are falling
- Your direct costs are increasing – (either direct product or direct labour)
Gross Profit Margin Improvement Video Tips
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