Increasing Gross Profit Increases Your Bottom Line
What is Gross Profit?
Gross profit is a company’s total revenue (aka total sales) minus the cost of goods sold. This is the profit a company makes after deducting the costs associated with making and/or selling its products, or the costs associated with providing its services. Gross profit will appear on a company’s income statement, (aka Profit and Loss report), a valuable report that can help business owners to avoid overspending.
How to Calculate Gross Profit
Business owners can calculate gross profit with this simple formula:
Gross profit = Revenue – Cost of Goods Sold
Gross profit shouldn’t be confused with operating profit, also known as earnings before interest and tax (EBIT).
| Revenues | |
| Sales Materials | 135,782 |
| Sales services | 8,295 |
| Total revenues | 144,077 |
| Costs and expenses | |
| Cost of sales – Materials | 123,516 |
| Cost of Sales – Labor | 3,004 |
| Selling, administrative and other expenses | 14,117 |
| Total costs and expenses | 140,637 |
To calculate the gross profit, we first add up the cost of goods sold:
Cost of sales – Materials ($123,516 ) + Cost of Sales – Labor (3,004) = $126,520
We do not include “Selling, administrative and other expenses”. We then subtract the cost of goods sold ($126,520 ) from total revenues ($144,077 ) to obtain a gross profit of $17,557.
Many things can impact your Gross Profit and help you boost your bottom line:
- Increasing revenue by making more sales and/or increasing your selling prices
- Decreasing the Cost of Sales by finding cost savings or operating more efficiently.
What is Gross Profit Margin?
Expressed as a percentage, the gross profit margin is useful for comparing a company’s efficiency over time. Gross profit can be used to calculate the gross profit margin. Gross profit is expressed as a currency value, gross profit margin as a percentage.
How to Calculate Gross Profit Margin
Gross profit margin = gross profit / revenue = ( or revenue – cost of goods sold ) / revenue
Can a Bookkeeper Help Me Calculate Gross Profit Margin?
Yes, professional bookkeeping services will help you maintain accurate records of accounts payable, accounts receivable, and inventory. Up-to-date income and balance sheets will help your business or nonprofit organization focus on growth and organizational planning.
Paisley Solutions offers outsourced and virtual bookkeeping services to all types of business owners and non-profit organizations in Southeastern Pennsylvania, Delaware, and Maryland. Contact our professional bookkeeping firm for a free consultation and needs analysis.