There are many elements to running a business, but the main one is to ensure that you are making more money than you spend. For businesses that have large, multiple outgoings, such as builders and mechanics, it can be an effort to keep track of the money spent to keep business going. However, you need to make sure your work is priced in relation to how much it costs you to run your business. By calculating your Gross Profit Margin , you can see how you need to price your jobs. Without knowing your Gross Margin, it is safe to say that your company will fall short.
What is Gross Profit Margin?
Gross Profit Margin is measured by the Revenue minus COGS (Costs Of Goods Sold), then divided by the Revenue itself. This is calculated to see how well the company is performing financially after the revenue and the Cost Of Goods Sold is deducted. Most companies would want to calculate this to see how much they have left after their sales. What you need to keep in mind is that the gross profit margin does not equal the margin for the whole business; it only equals the percentage of the sales revenue, and therefore indicates how well the company is using its resources. Generally speaking, the higher the percentage, the better the company is performing.
The metric would look like this:
Gross Profit Margin (calculated in %) = (Revenue – COGS) ÷ Revenue
What is Gross Profit and Net profit?
Gross Profit is the profit that is made after excluding the costs of the goods that has been sold. To not cause any confusion, Gross Profit should be calculated before calculating the Gross Profit Margin so that you will be able to know the Gross Profit (also known as Gross income) before calculating its margin. The formula for this would be:
Gross Profit = Revenue – Cost of Goods Sold.
Net Profit is the amount a company would have left after the taxes and operating expenses such as rent, payroll, or insurance have been deducted from the company’s revenue. On your income statement, the amount that your company has made after the Cost of Goods, operating expenses and taxes have been deducted is the Net Profit.
From receiving regular income statements, you should be able to calculate your average revenue, gross profit, and net profit as well as your operating expenses.
How is Gross Profit Margin useful?
Small companies and startups should be looking at a gross margin of at least 30% when pricing jobs. This means that if your company made £30,000 in sales revenue and the cost of goods sold were £5,000, the Gross Profit Margin would be 83% and the mark-up would be 500%. By keeping an eye on your gross profit margin, you can ensure you are charging the correct amount for your jobs, and not losing money.
How Tax Agility can help
The team at Tax Agility can help small business owners and aspiring business owners with their finances and show them how they can stay on top of their spending, making budgets, and making sure that their profits are steady. We are always eager to help out new and future businesses grow successfully.
For more financial advice on growing your business, contact Tax Agility on 020 8108 0090.