(800) 949-0401 
It is important that you as a business owner know how to calculate gross profit and gross profit margin. Calculating a business’s gross profit and gross profit margin is an easy way to track financial performance. These 2 metrics are what are often referred to as key performance indicators (KPIs).
Gross Profit vs Gross Profit Margin
Many successful businesses have been using KPIs for many years to measure their growth. Unfortunately, many small businesses ignore KPIs, but it is important to understand them to help you reach your business goals.
Gross profit is a metric used to assess how much of your revenue remains after the costs of making and selling your products or services are taken out. Gross profit is expressed as a dollar amount which allows you to see the overall picture of how your business operations are efficiently running.
To calculate your gross profit, use the following formula: Net Sales – Cost of Goods Sold
On the other hand, your gross profit margin is calculated using the following formula: Net Sales – Cost of Goods Sold / Net Sales
The gross profit margin also combines all the costs that are associated with selling products or services and removes these costs from your revenue, allowing you to see how effectively your pricing strategies bring in money for your business.
A high gross profit margin suggests that your business excels at delivering products or services to customers. The benchmarks vary depending on the industry, but generally a gross profit margin of 10% is considered good.
What This Means for Your Business
By carefully analyzing your gross profit and gross profit margin, you will be able to improve efficiency and save money. Additionally, you will establish more reliable and efficient processes to benefit your customers.
Customer experience is a huge factor in the success of your business. What happens internally in your business translates externally through customer experience improvements. In order to create an external customer experience, the best solution is often to focus on internal efficiencies. Operational efficiencies run the gamut of ways to make the processes run smoothly, and when done correctly it can impact the business.
Focusing on your internal processes is important as well as understanding the efficiency of your business to know how they stack up against the competition. Your KPIs are critical to compare and contrast your performance and finding where you can improve.
You cannot stack your business against others unless you have relevant data. It is important that you conduct competitors analyses throughout your business so that you are up-to-date with market trends and product offerings.
When you come across some flaws in your business operations, do not be upset. Be excited to know that you have some flaws and that you now know where you need to make improvements. You can learn from the strengths of your competitors and apply similar strategies to your own business.
The Bottom Line
Improving the efficiency will always be a journey and an on-going process. It is crucial that you always review your gross profit and gross profit margins continually and then analyze those of your competitors. The process of refinement is not only the key to better revenues, it will also help your customer experience.
