[et_pb_section fb_built=”1″ custom_padding_last_edited=”on|phone” _builder_version=”4.23″ custom_padding_tablet=”” custom_padding_phone=”0px||||false|false” da_disable_devices=”off|off|off” locked=”off” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on”][et_pb_row column_structure=”1_3,2_3″ _builder_version=”4.23″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” width=”100%” custom_padding=”||0px||false|false” locked=”off” global_colors_info=”{}”][et_pb_column type=”1_3″ module_class=”table-contents” _builder_version=”4.23″ background_color=”#f3f2f6″ custom_padding=”25px||25px||true|false” sticky_position=”top” sticky_limit_bottom=”section” sticky_position_tablet=”top” sticky_position_phone=”none” sticky_position_last_edited=”on|desktop” pac_dcm_carousel_specific_module_num=”0″ border_radii=”on|24px|24px|24px|24px” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text _builder_version=”4.23″ text_font=”||||||||” global_colors_info=”{}” background__hover_enabled=”on|desktop”][\/et_pb_text][\/et_pb_column][et_pb_column type=”2_3″ _builder_version=”4.16″ custom_padding=”|||” pac_dcm_carousel_specific_module_num=”0″ global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text admin_label=”Intro” _builder_version=”4.27.5″ header_2_font_size=”32px” header_2_font_size_tablet=”30px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet” locked=”off” global_colors_info=”{}”]<\/p>\n
Your gross profit margin tells you whether your pricing and production costs make sense. For every dollar of net sales, it shows how much is left after paying the direct costs of the goods sold or services delivered \u2013 before rent, admin, marketing and other overheads. In other words, gross profit focuses on the cost of getting your product or service out the door, and the margin shows how well you\u2019re doing that.<\/p>\n
Below, we\u2019ll cover the gross profit formula, the gross profit margin formula, what belongs in the cost of goods sold, and how to use these metrics to guide your pricing, cost management, and overall decision-making.<\/p>\n
[\/et_pb_text][et_pb_image src=”https:\/\/www.reckon.com\/au\/wp-content\/uploads\/2024\/05\/gross-profit.png” alt=”Gross profit = revenue – cost of goods sold Gross profit margin = (revenue – COGS) \u00f7 revenue \u00d7 100″ title_text=”Gross Profit” align=”center” _builder_version=”4.27.5″ _module_preset=”default” locked=”off” global_colors_info=”{}”][\/et_pb_image][et_pb_text admin_label=”Body & End” _builder_version=”4.27.5″ header_2_font_size=”32px” header_2_font_size_tablet=”30px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet” locked=”off” global_colors_info=”{}”]<\/p>\n
Both terms belong together, but they aren\u2019t the same. Gross profit is a dollar amount. It\u2019s the sales profit before your overheads. Whereas gross profit margin (or just \u2018gross margin\u2019) is a percentage. It shows what proportion of revenue you keep after production costs are accounted for.<\/p>\n
Think of \u2018gross profit vs gross profit margin\u2019 as like \u2018amount vs percentage\u2019. Both are valuable because the amount tells you how much profit you generated, and the percentage lets you compare performance across products and time periods.<\/p>\n
Gross profit = Net sales \u2013 Cost of goods sold (COGS)<\/strong><\/em><\/p>\n Use net sales (also called net revenue, i.e. total revenue minus returns, allowances, discounts, etc.), not gross\/billed sales. Net sales better match reality.<\/p>\n Gross profit margin = (Gross profit \u00f7 Net sales) \u00d7 100<\/strong><\/em><\/p>\n You can also write the gross profit margin calculation as:<\/p>\n (Net sales \u2013 COGS) \u00f7 Net sales \u00d7 100<\/strong><\/em><\/p>\n Both get you to the same number by dividing gross profit by net sales.<\/p>\n COGS are the costs involved in making or delivering your offer \u2013 costs that rise and fall with sales volume (variable costs). For a product business, that usually includes:<\/p>\n For a service business, your COGS could include:<\/p>\n What\u2019s not COGS? Operating expenses (the \u2018overheads\u2019 that keep the lights on) like rent, utilities, administrative costs, accounting, marketing and salaries. These are indirect costs and live below gross profit on your income statement.<\/p>\n Here\u2019s a scenario to look at for a business that creates products. Let\u2019s assume that you have net sales for the month of $120,000 and your COGS include:<\/p>\n In this example, you\u2019d calculated gross profit like the following:<\/p>\n Gross profit = $120,000 \u2013 $65,000 = $55,000<\/strong><\/em><\/p>\n So in order to get the gross profit margin, you\u2019d do:<\/p>\n Gross profit margin = ($55,000 \u00f7 $120,000) \u00d7 100 = 45.8%<\/strong><\/em><\/p>\n In other words, you keep 45.8 cents of the dollar after production costs to cover your operating expenses and eventually produce net profit.<\/p>\n Using gross profit for decisions:<\/p>\n Getting a complete look at your company\u2019s profitability requires all three measurements:<\/p>\n Gross profit measures the performance of your core offering before overheads.<\/p>\n Think rent, admin wages, utilities, insurance, marketing costs. In other words, subtracting operating expenses. It shows you your day-to-day operational efficiency.<\/p>\n Operating profit margin = Operating profit \u00f7 Net sales \u00d7 100<\/strong><\/em><\/p>\n Net profit margin shows you the share of sales that become bottom-line profits. Net income reflects everything \u2013 from finance costs and income taxes to one-offs. In other words:<\/p>\n Net profit margin = Net profit \u00f7 Net sales \u00d7 100<\/strong><\/em><\/p>\n You\u2019ll see all three on the company\u2019s income statement. When people ask about \u2018net income, gross profit and EBIT\u2019, they\u2019re moving down that ladder from top-line to bottom-line. None replaces the others. Instead, they give you a complete overview of your company\u2019s financial health when used together.<\/p>\n There\u2019s no universal number. A good gross profit margin depends on things like your model, pricing strategy, sector norms and more. So while a software business might post high gross profit margins (70%+) because its COGS is light, a food retailer might run thin margins but ultimately come up trumps on volume.<\/p>\n Use your specific industry\u2019s benchmarks to get to grips with what \u2018good\u2019 looks like. What matters most is improving your own margin without harming demand or quality.<\/p>\n [\/et_pb_text][ba_social_share icon_bg=”#03002e” icon_padding=”10px|12px|10px|12px|true|true” layout=”classic” show_text=”off” btn_padding=”0px|0px|0px|0px|false|false” btn_bg_color=”RGBA(255,255,255,0)” _builder_version=”4.23″ _module_preset=”default” custom_margin=”50px||||false|false” custom_padding=”25px||||false|false” custom_css_before=” content: %22SHARE THIS%22;|| font-size: 16px;|| font-weight: 700;|| line-height: 22px;|| letter-spacing: 0em;|| text-align: center;|| color: #ff5447;|| margin-bottom: 10px;|| display: inline-flex;|| position: absolute;|| margin-top: 10px;” border_width_top_main=”1px” border_color_top_main=”#e4e4e4″ border_radii_icon=”on|5px|5px|5px|5px” global_colors_info=”{}” custom_css_before_last_edited=”off|desktop”][ba_social_share_child _builder_version=”4.23″ _module_preset=”default” global_colors_info=”{}”][\/ba_social_share_child][ba_social_share_child network_type=”facebook” _builder_version=”4.23″ _module_preset=”default” global_colors_info=”{}”][\/ba_social_share_child][ba_social_share_child network_type=”linkedin” _builder_version=”4.23″ _module_preset=”default” global_colors_info=”{}”][\/ba_social_share_child][ba_social_share_child network_type=”email” _builder_version=”4.23″ _module_preset=”default” global_colors_info=”{}”][\/ba_social_share_child][\/ba_social_share][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/p>\n","protected":false},"excerpt":{"rendered":" Learn how to calculate your gross profile margin so you can discover whether your offerings have the potential to generate sufficient revenue.<\/p>\n","protected":false},"author":28,"featured_media":297082,"menu_order":0,"template":"","format":"standard","meta":{"_et_pb_use_builder":"on","_et_pb_old_content":"","_et_gb_content_width":"","inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"","footnotes":""},"sbh_category":[104],"class_list":["post-297080","sbh","type-sbh","status-publish","format-standard","has-post-thumbnail","hentry","sbh_category-financial-information"],"yoast_head":"\nWhat is cost of goods sold?<\/h2>\n
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Step-by-step example<\/h2>\n
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Interpreting your gross profit margins (and acting on them)<\/h2>\n
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Gross profit vs operating profit vs net profit<\/h2>\n
1. Gross profit: Net sales \u2013 COGS<\/h4>\n
2. Operating profit (EBIT): Gross profit \u2013 operating expenses<\/h4>\n
3. Net profit: Operating profit \u2013 interest \u2013 taxes \u2013 other expenses + other sources (e.g. non-operating income)<\/h4>\n
5 pitfalls in gross profit calculations<\/h2>\n
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What\u2019s a ‘good’ gross profit margin?<\/h2>\n