Gross Profit Percentage
The Gross Profit Percentage, also known as the gross margin percentage or gross profit margin, is a financial metric used to assess a company’s financial health and business model by revealing the proportion of money left over from revenues after accounting for the cost of goods sold (COGS).
It’s expressed as a percentage, and higher percentages indicate a company has more money to cover operating expenses, which may lead to more profitability.
Here’s how you calculate it:
- Subtract the total cost of goods sold (COGS) from total revenue (or sales) to get gross profit.
- Divide gross profit by total revenue.
- Multiply the result by 100 to get the gross profit percentage.
The formula looks like this:
Gross Profit Percentage = (Gross Profit / Total Revenue) * 100%
For example, if a company has total revenue of $200,000 and COGS of $120,000, the gross profit would be $80,000.
The gross profit percentage would be:
($80,000 / $200,000) * 100% = 40%
This means the company generates a gross profit of 40 cents for each dollar of revenue.
Example of the Gross Profit Percentage
Let’s assume that you own a business that sells handmade furniture. For the current year, the data looks like this:
- Total revenue (all the money you’ve made from selling your furniture): $500,000
- Total cost of goods sold (the money you’ve spent on wood, fabric, and other materials to make the furniture): $300,000
Here’s how you’d calculate the gross profit percentage:
- First, you need to calculate the gross profit. This is done by subtracting the cost of goods sold from the total revenue. So, $500,000 (revenue) – $300,000 (COGS) = $200,000.
- Then, you divide the gross profit by the total revenue to get a decimal: $200,000 (gross profit) / $500,000 (total revenue) = 0.4.
- Finally, you convert this decimal to a percentage by multiplying by 100: 0.4 * 100 = 40%.
So, your gross profit percentage is 40%. This means that for each dollar of revenue you bring in, 40 cents is gross profit that can be used to cover your business’s operating expenses and contribute to net profit.
