Calculating profit margins

Your gross profit margin is a key indicator of your business's overall health. The gross profit margin shows whether the average mark up on your products or services is enough to cover your direct expenses and make a profit.

To calculate your business's gross profit margin, you first need to calculate gross profit.

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

Gross profit

Gross profit is a valuable measure of your pricing policy, sales volume and cost of goods sold.

Gross profit

Use this formula to calculate your gross profit.

Gross profit = sales revenue - costs of goods sold

Gross profit margin

Gross profit margin is gross profit expressed as a percentage of sales.

Gross profit margin

Use this formula to calculate your gross profit margin.

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

Example: calculating gross profit margin

Below is an example profit margin for a bakery that sells sweet rolls, savoury rolls and a variety of bread loaves.

For each of their products, the cost of goods sold (cost to make), sales revenue (sale price), gross profit (sales revenue minus cost of goods sold) and gross profit margin are listed.

Product Cost to make Sale price Gross profit Gross profit margin
Sweet rolls $0.50 $2.00 $1.50 75%
Bread loaves $1.00 $3.00 $2.00 66%
Savoury rolls $1.50 $2.00 $0.50 25%

If the bakery sold 180 loaves of bread, 106 sweet rolls and 100 savoury rolls a day, the gross profits would be:

Product Daily target Gross profit Gross profit margin Daily gross profits
Sweet rolls 106 $1.50 75% $159
Bread loaves 180 $2.00 66% $360
Savoury rolls 100 $0.50 25% $50
Totals 386    $569

As a business owner this is a useful exercise to understand what your most profitable and unprofitable products lines are. You may even decide to stop offering some unprofitable lines and concentrate on your most profitable products.

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