Gross Profit Margin is a financial metric that measures how much profit a company makes after deducting the cost of goods sold from its revenue.
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Gross profit margin is a financial metric that showcases the profitability of a company’s core operations by analyzing the relationship between its revenue and the cost of goods sold. It’s the percentage of revenue that remains after deducting the direct costs associated with producing or purchasing the goods or services sold by the company.
To calculate your gross profit margin, you need two key figures – revenue and the cost of goods sold.
Once you have these numbers, you can use the following formula:
Gross Profit Margin = (Gross Profit / Revenue) * 100
For example, let’s say a company generates $500,000 in revenue and incurs $250,000 as the cost of goods sold.
The gross profit for that company would be $250,000. Now, we can apply the formula:
Gross Profit Margin = ($250,000 / $500,000) * 100
In this example, we find that the gross profit margin is 50%.
Unfortunately, the only correct answer to what a good gross profit margin is – it depends.
Because there are so many factors (e.g., industry, size, business model) that influence your specific gross profit margin, it can be hard to pinpoint what’s good without digging deep into your performance. That said, we pulled out some specific numbers from our product that you might find useful.
A good gross profit margin for SaaS and B2B companies in Xero is from 60% to 80%, according to Xero Financial KPIs for SaaS and B2B Companies.
A good gross profit margin for all companies in QuickBooks is around 67%, according to QuickBooks Benchmarks for All Companies.
If you want to stay on top of future trends and be able to instantly compare your performance to companies just like yours (in any given industry), you can join our Benchmark Groups – it’s free for everyone!
Depending on your industry and specific business model, some strategies will work better than others.
And while one-size-fits-all strategies don’t really exist, there are some tactics that industry experts in most industries turn to in their own businesses:
More resources to help you improve:
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Databox is a business analytics software that allows you to track and visualize your most important metrics from any data source in one centralized platform.
To track Gross Profit Margin using Databox, follow these steps:
The Xero Profit & Loss (P&L) Overview dashboard provides a detailed view of income, expenses, gross profit, and net profit trends. It includes net profit breakdowns by type and visual comparisons of revenue vs. expenses over time.
This report gives a snapshot of financial results using Xero data on income, expenses, cash flow, balance sheet, and overall financials, supporting informed financial decisions.
Gross margin is the percentage of revenue remaining after deducting the cost of goods sold, while net margin is the percentage of revenue remaining after subtracting all expenses, including operating expenses, interest, and taxes.
Gross margin is a percentage that represents the proportion of revenue remaining after deducting the cost of goods sold, while gross profit is the actual monetary value.
Total Operating Expenses (Budget) is a financial metric that represents the total estimated amount of money a company plans to spend on its operating expenses over a given period, with the purpose of controlling and predicting costs in the short and long term.
Total Expenses (Budget) is a financial metric that represents the total amount of money allocated for expenses during a specific period, as planned or forecasted in the budget. It helps to monitor the actual expenses and ensure that they align with the company's financial goals and objectives.
Current Assets by Asset is a financial metric that measures a company's short-term liquidity and cash flow by comparing its current assets to the total value of its assets. It helps assess the ability of a company to meet its short-term financial obligations.
The Current Liabilities by Liability metric measures the proportion of a company's short-term debts compared to their long-term debts, providing insight into the company's ability to meet its obligations in the near future.
The Awaiting Payments metric in Xero shows the total amount of money that has been invoiced but not yet received from customers.
Net Profit Margin is a financial metric that represents the percentage of profits earned from revenue after all expenses, including taxes and interest, are subtracted.
The Average Creditors Days metric is a measure of how long it takes a business to pay its suppliers. It is calculated by dividing accounts payables by the average daily cost of goods sold and is a key indicator of a company's cash flow management and supplier relationships.
The Quotes Accepted metric in Xero measures the total value of quotes that have been accepted by customers, indicating a successful conversion of sales.