How to Calculate Gross Profit % (Formula, Examples, & Template)
Published October 6, 2022.
Many people get confused between gross profit vs gross margin vs gross profit percentage. Even though they're closely linked, it's important to understand the subtle differences.
Gross profit is also known as gross income or sales profit. It's the total amount that is left after you deduct the direct costs of manufacturing and selling your product. Gross profit margin and gross profit percentage are basically the same concepts as gross profit—only these terms are expressed as a percentage or a ratio, and not a dollar amount.
The Purpose of Gross Profit Percentage
Your gross profit percentage assesses the overall financial health of your company. As a business owner, you can use this information to compare your company’s operating performance with competitors in the same sector or industry. You can also use it to assess the viability of a particular product or service.
Cost of Goods Sold (COGS) is used in the formula to calculate this metric. COGS refers to the direct costs incurred by a company to produce the products it sells. This includes any material and labor costs, but excludes indirect costs such as shipping and sales.
» How do you calculate COGS? Follow this easy guide
Calculating Gross Profit Percentage
To calculate your company's gross profit percentage, you would use this formula:
(Total Revenue – Cost of Goods Sold)/Total Sales x 100
1. Calculate Total Sales
To calculate your total sales, you need to find the net sales revenue for the period you're measuring. In other words, your "net sales" is the revenue that all sales earn during the specified period, less the returns, discounts, and any allowances you provide for your products.
Let's look at an example. You own a clothing retail company. Your company paid out $20 000 in refunds and offered discounts of $30 000 for the specified period. Your gross sales come up to $150 000. Therefore, your net sales revenue is $100 000 = $150 000 - ($20 000 + $30 000).
In the formula, the value fits in here:
Gross profit percentage = (Total revenue - COGS)/ $100 000 x 100
2. Determine Gross Profit
You can calculate your gross profit by deducting the COGS from your company's net sales revenue for the specified period. Your COGS, as mentioned, will include the cost of providing labor, raw materials, and other direct expenses.
Let's continue with the example. If your company's net profit is $120 000 and the COGS is $50 000. Therefore, your gross profit is $70 000 = $120 000 - $50 000.
In the formula, the value fits in here:
Gross profit percentage = ($70 000 / $100 000) x 100
3. Calculate Gross Profit Percentage
Now that you have the gross profit and net sales revenue you can divide these values as per the formula and multiply the result by 100.
Gross profit percentage = ($70 000 / $100 000) x 100 = ($0.7) x 100 = 70%
4. Evaluate the Results
A gross profit percentage of 70% is considered healthy. In fact, if it falls between 50% to 70%, your gross profit percentage is good, especially if you're a retailer, owned a restaurant, or manufactured goods.
In comparison, a gross profit percentage between 50% to 70% of a service-orientated business is considered unhealthy because you're selling a service and not a product that requires raw materials. This could mean that you're spending too much money on indirect costs. If your gross profit percentage came to 30%, you may need to review your prices and perhaps consider increasing them if you can't find any unnecessary leaks.
» What other profit margin calculations are there? Learn the difference between net, gross, and operating margins
Besides serving measurement purposes, the gross profit percentage can also drive continual process improvement in return. By doing this calculation regularly, you can track the overall health of your company and monitor any changes that may occur.
As with any calculation, there are profit calculation mistakes to avoid. If these formulas are just too complicated for you, then consider investing in BeProfit. BeProfit enables an effortless understanding of your business's bottom line by offering you the tools you need to calculate these metrics with ease.