Gross Profit is not the Same as Gross Margin
Gross Profit vs Gross Margin
Gross profit is a currency amount, while margin is a ratio or percentage. Gross profit margin is the percentage left as gross profit after subtracting the cost of revenue from the revenue.
You calculate it by dividing the gross profit by the revenue.
Gross Margin Calculation
In our coffee shop example above, the gross profit was $80,000 from revenue of $200,000.
This gives a gross profit margin of $80,000 / $200,000 = 40%.
Gross Profit Difference
For every dollar in sales, the coffee shop has 40 cents in gross profit that it can use to pay for other business expenses (and hopefully have something left as net profit if it is a profitable business).
- Profit / Income: Dollar amount (as in $1,000)
- Margin: Percentage (as in 10%)
A higher gross profit margin is better
If a company’s gross margin increases, it means that the company is making more money per unit sold.
In other words, the company is becoming more efficient and generating more profits for the same amount of labor and material cost.
The best ways to increase gross margin are to raise prices or reduce the cost of producing the goods or services.