Calculating gross margin can show you if you’re spending too much time or labor on a certain product or service. A business with strong total sales could seem healthy on the surface, but might actually suffer losses if high operating expenses aren’t considered. Generally, gross profit margin is a better way to understand the profitability of specific items rather than an entire business. Gross profit margin = (gross profit ÷ revenue) x 100 Gross profit = revenue – cost of goods soldĪfter you calculate gross profit, you can determine the gross profit margin using this calculation: Gross profit can be found using the following formula: Some examples include raw materials, labor wages, and factory overhead expenses. COGS refers to the costs necessary to produce or manufacture your products or services. Gross profit is the revenue that remains after you deduct the cost of goods sold (COGS). Read our breakdown of each margin to learn more. You can calculate your company’s gross profit margin, operating profit margin, or net profit margin.Įach of these three formulas provides unique insight into your financial health, and helps you make informed business decisions. There are three types of profit margins business owners, accountants, lenders, creditors, and investors rely on. And major economic events like the COVID-19 shutdown tend to shrink every company’s margins.īelow, you’ll find three formulas to calculate profit margin, a handy list of average profit margins by sector, and tips to give your margins a boost. It’s a percentage that measures how profitable your pricing strategy is, how well you control costs, and how efficiently you use raw materials and labor to produce your products or services.īut once you know what profit margin is and why it matters, the next logical question is, “What is a good profit margin for my line of business?” The answer varies by location, industry, business model, age of the business, and growth goals. As the name suggests, profit margin refers to the money that remains after you deduct your small business expenses.