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A practical guide for starting a small business

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Gross Profit Margins

Know if you are Generating Earnings

Gross Profit Margins give you an indication whether your small business is generating earnings.   This is a vital sign to the health of your business. Without profitably revenue, no business whether large or small will be able to survive very long.  

Photo Credits:  3D Money -  Owais Khan,  Money - Gabriella Fabbri

Step 1: Gross Profit - A Component of Gross Profit Margins

A key element of the Gross Profit Margins is obtaining the Gross profit of your business.  Gross Profit is the amount of money left over after the goods acquired have been paid.  Here is the Gross Profit formula:

Step 2: Gross Profit Margins Calculation

Once the Gross Profit value is determined, it can be used to generate your Gross Profit Margins.  Gross Profit Margin is the percentage of each dollar remaining after cost of goods acquired has been paid.  Generally, the higher the percentage, the better condition is the business in.  Here is the Gross Profit Margin formula:

Gross Profit = Revenue - Cost of Goods

Gross Profit Margin = Gross Profit / Sales

Example of Gross Profit & Gross Profit Margin Calculation

Step 1:

Gross Profit:  $100,000 revenue - $40,000 cost of goods

Gross Profit = $60,000

Step 2:

Gross Profit Margin = $60,000 Gross Profit / $100,000 Sales

Gross Profit Margin = 60%