Gross Profit Margin is a financial metric that measures how much profit a company makes after deducting the cost of goods sold from its revenue.
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Gross profit margin is a financial metric that showcases the profitability of a company’s core operations by analyzing the relationship between its revenue and the cost of goods sold. It’s the percentage of revenue that remains after deducting the direct costs associated with producing or purchasing the goods or services sold by the company.
To calculate your gross profit margin, you need two key figures – revenue and the cost of goods sold.
Once you have these numbers, you can use the following formula:
Gross Profit Margin = (Gross Profit / Revenue) * 100
For example, let’s say a company generates $500,000 in revenue and incurs $250,000 as the cost of goods sold.
The gross profit for that company would be $250,000. Now, we can apply the formula:
Gross Profit Margin = ($250,000 / $500,000) * 100
In this example, we find that the gross profit margin is 50%.
Unfortunately, the only correct answer to what a good gross profit margin is – it depends.
Because there are so many factors (e.g., industry, size, business model) that influence your specific gross profit margin, it can be hard to pinpoint what’s good without digging deep into your performance. That said, we pulled out some specific numbers from our product that you might find useful.
A good gross profit margin for SaaS and B2B companies in Xero is from 60% to 80%, according to Xero Financial KPIs for SaaS and B2B Companies.
A good gross profit margin for all companies in QuickBooks is around 67%, according to QuickBooks Benchmarks for All Companies.
If you want to stay on top of future trends and be able to instantly compare your performance to companies just like yours (in any given industry), you can join our Benchmark Groups – it’s free for everyone!
Depending on your industry and specific business model, some strategies will work better than others.
And while one-size-fits-all strategies don’t really exist, there are some tactics that industry experts in most industries turn to in their own businesses:
More resources to help you improve:
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Databox is a business analytics software that allows you to track and visualize your most important metrics from any data source in one centralized platform.
To track Gross Profit Margin using Databox, follow these steps:
The Xero Profit & Loss (P&L) Overview dashboard provides a detailed view of income, expenses, gross profit, and net profit trends. It includes net profit breakdowns by type and visual comparisons of revenue vs. expenses over time.
This report gives a snapshot of financial results using Xero data on income, expenses, cash flow, balance sheet, and overall financials, supporting informed financial decisions.
Gross margin is the percentage of revenue remaining after deducting the cost of goods sold, while net margin is the percentage of revenue remaining after subtracting all expenses, including operating expenses, interest, and taxes.
Gross margin is a percentage that represents the proportion of revenue remaining after deducting the cost of goods sold, while gross profit is the actual monetary value.
Profit and Loss by Type shows the profitability of your business by categorizing income and expenses into specific types like sales, cost of goods sold, and operating expenses.
Net profit is the amount of revenue a business earns after deducting all expenses, including taxes and interest. It reflects a company's overall profitability and is a key measure of financial success.
The Opening Balance by Bank Account metric in Xero is a report that displays the balance of each bank account at the beginning of a specified financial period. It provides a snapshot of the account balances before any transactions for the selected period have been entered into Xero.
Total Assets represents the total value of an organization's resources, including cash, accounts receivable, inventory, property, and equipment.
The Current Liabilities by Liability metric measures the proportion of a company's short-term debts compared to their long-term debts, providing insight into the company's ability to meet its obligations in the near future.
The Draft Invoices metric in Xero refers to the number of invoices that have been created but not yet finalized. It measures the efficiency of the invoicing process and helps ensure that all invoices are accurately and promptly sent to clients for payment.
Short-term cash forecast predicts a company's cash inflows and outflows over a short period, usually a month or a quarter, to ensure they have enough liquidity.
Assets to Liabilities metric is a financial ratio used to determine a company's ability to pay off its debts with its assets. Higher ratio indicates better financial health.