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How to calculate percentage: for example find 5% percent of 70. To do this, enter 5 in the first box of our online too and 70 in the second box: the result is 3.5,. Nov 13, 2018 - A percent designates how much of one quantity is made up by another quantity, and is always calculated in relation to 100. Here's a look at.
- 1 The Disadvantages of Business Metrics
- 2 The Process of Business Engineering Metrics
- 3 About Business Financial Planning
- 4 What Is the Difference Between Sales & Production?
Most small businesses start as 'flying by the seat of your pants' operations, with little use of data for decision making. As the business grows, however, it becomes essential to introduce ways of measuring and assessing various aspects of the business to ensure growth and profitability. The gross profit margin percentage is one of these basic and useful assessment tools.
Tip
To calculate the gross profit margin percentage, divide gross profits by total revenue.
Three Definitions to Get Started
Here are useful definitions related to the calculation:
- Gross profit: What's left after deducting the cost of making and selling the product. The formula is: Gross Profit = Revenue - Cost of Goods Sold.
- Net profit: What's left after subtracting from Gross Profit all other business operating expenses, such as interest and taxes.
- Revenue(or Total Revenue): All income derived from the sales of goods or services. The formula is: Quantity of Goods Sold x Price of Goods.
Calculating the Gross Profit Margin Percentage
You calculate the gross profit margin percentage by first calculating the Gross Profit (Revenue minus Cost of Goods sold), then dividing the result by Revenue. The formula for gross profit margin percentage is:
((Revenue - Cost of Goods Sold) ÷ Revenue) x 100
For example, a company has revenue of $500,000; cost of goods sold is $200,000, leaving a gross profit of $300,000. Dividing this result by $500,000 results in a profit margin of of 0.6. Multiplying 0.6 by 100 expresses the gross profit margin as a percentage, which in this instance is 60 percent. This means that for every revenue dollar the business generates 60 cents in profits before payment of other business expenses.
What Does the Gross Profit Margin Percentage Tell You?
The gross profit margin percentage gives you valuable information about your business. Overall, the GPMP is a good indicator of the company's financial health. Its simplicity makes it an easy metric for comparing your business to your competitors' (assuming their GPMP's are known). If your GPMP is better than your competitors', it confirms that you're operating the business with better than average efficiency. If your GPMP is less than your competitors', it's a warning that your pricing, sales and/or manufacturing adjustments need to be made.
It's also a useful metric for examining your business over time. When calculated at regular intervals, a stable GPMP indicates that the company's processes are functioning well. If it's volatile, with substantial changes from quarter to quarter, this can be a warning of a weak spot somewhere in the production, pricing or sales process. If the GPMP is steadily decreasing from quarter to quarter, this calls for one or both of two remedies: increasing pricing and/or reducing production costs.
Limitations of Gross Profit Margin Percentage
![How To Calculate Percentage How To Calculate Percentage](https://www.wikihow.com/images/thumb/4/4c/Calculate-Percentages-Step-13-Version-3.jpg/aid23903-v4-728px-Calculate-Percentages-Step-13-Version-3.jpg)
GPMP is a well established financial metric, but it doesn't tell you everything. Although it's often used as a metric showing overall company efficiency, a decrease in GPMP may have to do with a pricing issue alone. Also, GPMP doesn't necessarily establish where the problem in low margins originates. In other instances, a company may have an excellent GPMP but insufficient sales volume to adequately cover the expenses not included in gross profits. Sometimes, even though the GPMP is low, the company's overall profitability may remain high because of unusually high sales volume.
When the GPMP is lower than the competition's, rather than indicating a problem it may be the result of a deliberate sales strategy designed to lead eventually to higher sales volume. Some of the world's most successful companies – for example, notably, Amazon – have had negative GPMPs for more than a decade by design. But by 2017, Amazon had become the world's third largest retailer, with substantial annual increases in profit margins.
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About the Author
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.
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Categories: Mathematics | Critical Thinking
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