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Gross Profit Margin
A business that boasts a higher Gross Profit Margin than its competitors and industry is more efficient. Gross Profit Percentage = Gross Profit divided by Total Revenue. For illustration purposes, let’s calculate the gross profit margin of Greenwich Turf Supplies (a fictional company) using its income statement.
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Assume the average turf supply company has a gross margin of 30%. There is no known industry benchmark for turf producers this figure is for similar type farming operations.
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We can take the numbers from Greenwich Turf Supply’s income statement and plug them into our formula for Gross Profit Percentage:
$162,084 gross profit
—————(divided by)—————
$405,209 total revenue.
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The answer, 40% tells us that Greenwich is much more efficient in the production and distribution of its product than most of its competitors. The gross profit margin tends to remain stable over time. The only thing that effects the margin is the costs associated with the production of the turf. If the cost of production relative to sales increases then the gross profit margin decreases.
You can use the Gross Profit (GP) Percentage to determine what percentage of sales is available to fund the overhead expenses and the owner’s drawings from the business.
If we calculate a separate GP % for any varieties of turf that we grow, the GP% can also be used to determine what variety of turf will be the most profitable to grow.
Break - Even Analysis
Once we have determined the Gross Profit percentage on total sales we can calculate the total gross sales to Break-Even. This calculation requires only two financial figures, total overhead costs and the Gross Profit Percentage. Taking the Greenwhich costs lets assume overhead costs are $150,000.
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$150,000 Overhead costs
—————(divided by)—————
0.40 GP %
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The answer $375,000, which means your total sales will need to be more than $375,000 before you start to make money.
