Measuring profitability

There are 2 types of profit margin you can calculate for your business - gross and net.

Gross profit margin

Your gross profit margin is the percentage of sales dollars left after you subtract the production cost of goods sold from the total sales figure. It measures the percentage of sales dollars remaining to pay your overhead expenses and provide you with a profit.

The gross profit for a manufacturing business is the difference between the value of goods sold to clients (sales) and the cost of direct materials, direct labour and factory overheads incurred in making these goods (cost of goods).

Use the following interactive calculator to help you work out your gross profit margin. Once you have read and understood the example, you can type the numbers that are relevant to your business into the calculator to see your gross profit margin

Gross profit margin

Use this formula to calculate your gross profit margin.

Gross profit margin = (gross profit ÷ sales revenue) x 100

In this example, for every $1 of sales, the business is making 28.6 cents gross profit to cover overhead expenses and provide for a profit.

Net profit margin

Your net profit margin shows how much money is left after deducting direct and overhead expenses from gross profit. This ratio is the percentage of sales dollars left after subtracting the cost of sales and all other expenses, except tax.

This information will help you compare your business's return on sales with the performance of other businesses in your industry. Use the following interactive calculator to help you work out your net profit margin. Once you have read and understood the example, you can type the numbers that are relevant to your business into the calculator to see your net profit margin.

Step 1

Use this formula to calculate your net profit before tax.

Net profit before tax = gross profit - overheads

Step 2

Use this formula to calculate your net profit margin.

Net profit margin = (net profit before tax ÷ sales revenue) x 100

In this example, for every $1 of sales, the business is making a net profit of 8.6 cents.

Using profit margin data

You can compare your gross and net profit margin ratio data with other businesses in your industry. In this way you can work out where you need to improve efficiency to catch up with the competition, and spot profitability trends that show you where other businesses are catching up.

You should bear in mind that while an overall picture of your business's profit margin is useful, it is often more important to check the profit margin of specific products you make. In this way you can judge whether you should stop production of certain items because they are not profitable, or concentrate production and marketing efforts to improve a certain product's profitability.

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