On a daily basis, as we work alongside businesses to manage their business finance we come across plenty of opportunity for businesses to grow, by simply focusing on one aspect – the Gross Profit Margin of their business.
Gross profit margin is calculated by subtracting cost of goods sold from total revenue, dividing the result by total revenue and multiplying by 100. Using this formula, gross profit margin is expressed as a percent. This makes it easier to compare a company to industry standards and benchmarks. The greater the gross profit margin, the more profitable the company is before consideration of general and administrative expenses.
Gross profit margin is used to determine how much can be spent to cover operating costs and still leave profit for the business owner. Stated differently, gross profit margin reflects the difference between costs of production and product revenue. The greater the gross profit margin, the greater the revenue left to absorb operating costs and make a profit.
The importance of this percentage is that every percent that you save or gain runs through to the bottom-line of the entity and falls right into the "future of your company". This extra resources gained can be used to expand (grow the business), invest in other projects, bless the society and other businesses in order to enhance the community that you are part of. In our opinion something worth to enter into a battle as we do business with a long term vision and to have an impact in society!
Let us first take a look at the difference between the mark up and gross profit. Here is how each one is calculated!
|Mark up of 50%||Gross Profit||33%|
|Calculated (Mark-up/Cost)||Calculated (Gross Profit/ Sales)|
The three main sectors of business are manufacturing, trading and services. Each sector has a different component to keep an eye on to protect the gross profit margin.
In manufacturing the most important part of the Cost of Sales is material and direct labour in the manufacturing process. In a trading business it is material purchased and in services businesses it is labour and other small expenses.
Protecting your Gross Profit Margin really has a huge impact on the future of your business, just consider the following. If we take a turnover of R1 000 000 per month, every percent you can gain or save on GP% will have an impact of R10 000 per month. Or if you should you be able save 5%, the gain per month will be R50 000 and over a year R600 000.
Take time to consider your business’ Gross Profit Margin and take action to protect it. If you need some assistance in doing this, contact us at Technibook, we will help you.