Gross Profit Formula…Simplified

Business PlanningContractors

02/27/2015 | By Scott Siegal

Is your company’s profit stagnant?

If so, one of the best ways to overcome a profit plateau is smart budgeting. Consistently calculating your gross profit keeps your company on track, financially. You’ll be surprised how a little bit of intentionality can go a long way!

Certified Contractors Network loss or profitBudgeting can be intimidating. Most contractors we meet have stumbled into business ownership for the love of the job more than the love of running a business. With hiring, training, ordering, and supervising, it’s no wonder intentional budgeting often gets overlooked.

Since it can be hard to know where to start, we’re breaking it down for you.

What is the Gross Profit?

Gross profit is the remaining profit after the job costs, including: labor, materials, and production  costs, have been deducted. A company’s gross profit is calculated as follows:

Sales – Cost of Goods Sold = Gross Profit

Note that the gross profit is a dollar amount.

Gross Profit Margin

The gross profit margin is a percentage, rather than a dollar amount. It can be calculated by completing the following equation:

Gross Profit ÷ Sales = Gross Profit Margin

A successful company will have a gross profit margin of 40-50 percent. (Check out this awesome Gross Profit Margin Formula in Excel from Chron for more help!)

The gross profit margin is an excellent way to assess the longevity of every business!

Fixed Versus Variable Costs

Wondering how to budget for a 40-50 percent profit margin? Distinguishing fixed versus variable costs is essential to obtaining a successful profit margin.

Fixed costs are reliable and constant. These include:

  • Worker salaries–including supervisors, laborers, salespeople, owners, etc.
  • Employee benefits
  • Rent
  • Other office expenses–supplies, internet, utilities
  • Auto expenses
  • Advertising

Variable costs, or costs that tend to change, include:

  • Hours of labor
  • Materials used
  • Machinery
  • Packaging

Once fixed and variable costs have been established and recorded, the gross profit can be easily calculated.

Feeling lost?

If the above information has left you feeling more lost than empowered, let Certified Contractors know. We give contractors around the nation thetools and knowledge they need to grow their business, gross profit formula included.

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