Every business owner needs to know how to calculate their gross profit margin and net profit margin.
After all, it’s what shows you how much profit you’re making!
How much profit your business is making might be the most important number you’ll ever want to know as a business owner.
In accounting terms, this is known as your profit margin. There are two kinds of profit margins, gross profit margin and net profit margin.
It depends on whether you’re trying to calculate gross profit margin or net profit margin. Both tell you important information about the overall financial health of your business. So let’s look at them one at a time.
You own a contracting business, and in one week…
$10,000 gross revenue – $6,000 production cost = $4,000
$4,000 / $10,000 x 100 = 40%
So, your gross profit margin for the week is 40%.
Let’s say you own the same contracting business as the first example, but instead of just subtracting the cost of goods and services sold, this time you also include all of your company overhead expenses and taxes. We determine that the additional cost is $3,000.…
$10,000 – $6,000 – $3,000 = $1,000
$1,000 / $10,000 x 100 = 10%
So, your net profit margin for the week is 10%. Or you can look at it this way, for every $100 dollars you earn, you will keep a net profit of 10% or $10.
I hope this helped. Of course the fastest and easiest way to calculate and see both your Gross and Net Profit dollars and percentages is to design your accounting system to automatically display those numbers on your Profit & Loss reports.