What is Gross Profit Margin?
The Short Answer
Gross Profit Margin explained simply
Gross Profit Margin is a key financial metric. It tells you the percentage of revenue that exceeds the cost of goods sold (COGS). COGS includes the direct costs of producing the goods or services a business sells. Think of it as the money left over to cover operating expenses and make a profit after paying for the raw materials and labor directly tied to what you sell. It’s a simple but powerful way to see how well a business controls its production costs.
Real-World Example
The T-Shirt Business Example
Imagine a T-shirt business. \n\n Sales Revenue: $10,000 (100 T-shirts sold at $100 each)\n Cost of Goods Sold (COGS): $4,000 (cost of blank T-shirts, printing ink, and direct labor to print)\n\nGross Profit: $10,000 (Revenue) - $4,000 (COGS) = $6,000\n\nGross Profit Margin: ($6,000 / $10,000) * 100% = 60%\n\nThis means for every dollar of sales, the T-shirt business has 60 cents left to cover other expenses and make a net profit.
Why this matters
Gross Profit Margin is important because it shows the core profitability of a business. A good margin means the business can cover its production costs and still have enough money to pay for things like rent, marketing, and salaries. It helps buyers understand if a business is priced right and if it has room to grow.
Always look at the trend of the Gross Profit Margin over time. A declining margin can signal problems with pricing, production costs, or competition. An increasing margin is a good sign of efficiency.
Always look at the trend of the Gross Profit Margin over time. A declining margin can signal problems with pricing, production costs, or competition. An increasing margin is a good sign of efficiency.
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