How Do You Calculate Profit Margin?
It depends on whether you’re trying to calculate gross profit margin or net profit margin. Both tell you important information about the overall financial health of your business. So let’s look at them one at a time.
Calculating Gross Profit Margin
Gross Profit = Total Revenue – Cost of Goods or Services Sold
Gross Profit Margin Percentage = Gross Profit / Total Revenue x 100 (yields a percentage)
An Example of Gross Profit and Gross Profit Margin Calculations:
You own a contracting business, and in one week…
Your total revenue = $10,000
Cost of Services Sold = two employees paid $1,600 gross payroll + another $1,000 for burden costs + $3,400 for construction materials
To compute gross profit for this example:
$10,000 gross revenue – $6,000 production cost = $4,000
To calculate your gross profit margin percentage:
$4,000 / $10,000 x 100 = 40%
So, your gross profit margin for the week is 40%.
Calculating Net Profit Margin
Net Profit = Gross Profit less Company Overhead and Taxes (also known as Net Income or “the bottom line” in financial statements).
Net Profit Margin = Gross Profit less Company Overhead and Taxes / Total Revenue x 100
An Example of Net Profit & Net Profit Margin Calculations:
Let’s say you own the same contracting business as the first example, but instead of just subtracting the cost of goods and services sold, this time you also include all of your company overhead expenses and taxes. We determine that the additional cost is $3,000.…
To compute net profit for this example:
$10,000 – $6,000 – $3,000 = $1,000
To calculate your net profit margin percentage:
$1,000 / $10,000 x 100 = 10%
So, your net profit margin for the week is 10%. Or you can look at it this way, for every $100 dollars you earn, you will keep a net profit of 10% or $10.