Every business owner must regularly monitor the profits that his/her business is making. Profit is the earning that one can make by carrying out a business activity. The objective of every business is to make the profits grow over time. So, to gauge the health and growth of any business, it is important to know how to measure the profitability of the business. There are two ways in which one can measure the profitability of a business by looking at its gross profit and net profit.
Here, we will discuss the concept of gross profit and explain how Fisdom ’s online profit calculator can help in easily determining the gross profit percentage for a business.
What is gross profit margin?
Profit margin is:
- one of the ways to assess the profitability
- widely used to estimate how much money a corporation or enterprise is able to make
- used to know the percentage of revenue that is converted to profits
The gross margin percentage shows how much profit the company has earned for every rupee of sales.
How to use Fisdom ’s profit calculator to estimate gross margin percentage?
Gross profit margin is an important metric to gauge a company’s profitability. It is expressed in percentage form. The profit calculator estimates the gross profit margin or gross margin percentage using the following formula.
Gross margin percentage = (Total revenue – Cost of item)/total revenue
While using Fisdom ’s profit calculator, a user must input the following details in it to fetch gross margin percentage:
- Cost of item in rupees
- Markup percentage
Here is an example to understand how the calculator works:
Revenue = Rs. 55,000
Cost of item = Rs. 50,000
Gross margin percentage = [(Total revenue – Cost of item)/Total revenue] x 100
Gross margin percentage = (Rs. 55,000 – Rs. 50,000)/Rs. 55,000 x 100 = 9.09%
How to interpret gross profit margin
By looking at a company’s gross profit margin, an investor can gauge how successful its management team has been in generating revenue after considering the costs related to the products or services.
- The higher the gross margin percentage, the more efficient the management is in earning profits for every rupee of the cost incurred.
So, in the above example, every rupee that the company incurs in cost, it has generated 9 paise in gross profit. While analysing a company, investors generally prefer a higher ratio, as this indicates that the company is able to sell its inventory for a higher profit.
- Gross profit margin gives a broad indication of a company’s profitability, however, it should not be used as the only measurement.
Investors and analysts ideally make use of both gross profit margin and net profit margin to know the effectiveness of a company’s management in earning profits as compared to the cost incurred in producing the offerings. It makes sense to compare the margins of companies within the same industry and over multiple periods to get a sense of any trends.
What are the factors impacting profit margin?
Profit margin is primarily determined by two factors:
- sales and
- expenses
To maximize profit margin, it is important for companies to focus on lowering expenditure and achieving higher net sales.
Generally, companies aim to achieve rising revenue and minimize costs to increase their profit margin. Further, achieving higher sales is possible by either rise in prices or higher sales volume or a combination of both. This is, however, a theoretical approach.
In practical scenarios, price rises are possible only to the extent that the company does not lose its competitive advantage. Sales volumes are also dependent on market conditions such as net demand, market share commanded by the company, and the current state of competitors. Similarly, companies may also see a limited scope of controlling costs.
How is the profit calculator useful?
Some of the benefits offered by the profit calculator are:
Calculating profitability
Every business aims for profitability from its core operations. To achieve profitability, the company should be capable of selling its goods or services at a price that is higher than the cost that is being incurred for generating the products or services. This is known as the gross profit.
Fisdom ’s profit calculator can help in estimating the gross profit or a company’s profitability.
Falling gross profit
When a company’s gross profit or gross profit margin falls, it means that the company is not being profitable. This tells the company’s management that they have to control the cost of producing the goods sold or services offered to increase the gross profit margin. This may require a re-look at the company’s purchasing and negotiation policies. Containing overheads, cutting down on labour costs, and improving efficiency are some of the ways to get the profit margin on track.
A falling gross profit also indicates that the company may be selling goods or offering services at a price that is too low to earn enough profits. In such scenarios, the management can tweak the pricing to attain further profitability.
With the help of Fisdom ’s profit calculator, companies can calculate gross profits across a range of time periods and determine if there is a drop in gross profits. Accordingly, management can take the right measures to control or avoid further falls in gross profits.
Conclusion
The profit calculator can help companies in easily estimating the gross margin percentage. Investors can also make use of this calculator to estimate the profitability of companies that they may have invested in.
FAQs
There is no one-size-fits-all number for an ideal gross profit margin and a healthy percentage can differ across industries, company sizes, and depend on years of operation. However, some analysts, as a rule of thumb, consider 20% as a high margin, whereas 10% is considered as a healthy margin.
A profit calculator helps in estimating the gross margin percentage within a few seconds instead of involving lengthy manual calculations that may sometimes be flawed. It provides accurate results that can further be used to gauge company profitability.
Yes, Fisdom ’s online profit calculator is available for free and can be used at any time.
Gross profit does not take into account indirect expenses, whereas net profit can give a closer look at real profitability by considering the indirect expenses.
Investors typically use both gross profit and net profit margin to look at the efficiency of a business. This allows them to make comparisons between companies and across sectors while looking at profitability from a broader and minute perspective.
