Gross profit calculator
This gross profit calculator and Gross Profit Margin calculator will help you determine the right selling prices for your products in order to save money and increase profits.
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How to calculate Gross Profit
A very important financial concept for every startup and business is calculating gross profit and gross profit margins. The way to do this is to get a gross profit markup.
Gross profit calculation Formula
The way to calculate Gross Profit is as follows:
How much it costs to make – how much you sell it for = Gross Profit.
The cost to make a product includes all the costs from start to finish that you pay. If you are able to get products or raw materials at a discount, use the discounted amount.
Difference between variable and fixed costs for understanding Gross Profit
If you really want to dig in deeper, there is a difference between variable and fixed costs.
Variable costs go up as the amount of products or services you make go up. Think about variable costs like:
- Post and sending costs
- Cost for Materials
- Cost for production
- Costs for storage
Fixed costs don’t change so quickly when your sales and number of products goes up. They are more static. Think about things like:
- Office supplies
- Costs for administration
- Advertising and sales
Variable costs are what you use in calculating Gross Profit. Some people call these “cost of goods sold”. Fixed costs aren’t included in the calculation of your gross profit. Fixed costs are sometimes called operating expenses.
Calculating profit margin
While gross profit is an amount in dollars or euro. Your gross profit margin is a percentage. You also want to track your Gross Profit Margin, because you might be able to increase your gross profit, but if it is by also making lots more production or promotion costs it might still get you financially worse off.
Gross profit margin calculator
Gross profit margin is also important to track, since it allows you to keep an eye on profitability trends. This is critical because many businesses have gotten into financial trouble with an increasing gross profit that coincides with a declining gross profit margin.
The gross profit margin formula is calculated as follows:
Gross Profit / Sales = Gross Profit Margin.
In writing it is How much it costs to make, minus how much you sell it for. Now we have the Gross Profit an amount in dollars or euro’s. Now devide that by how much you sell it for and you’ll have your gross profit margin.
How to increase gross profit
There are only three ways to increase gross profit and gross profit margin:
1. Increase your Sales prices.
2. Decrease the cost of production.
3. Sell more
Sounds great, but it isn’t as easy as they sound. Because if you increase prices, this might cause sales to drop. Yikes! And if Sales decrease too much, the whole idea of increasing the price might leave you off worse than you started. There would be a higher gross profit margin, but lower total gross profit.
Unless you are undercharging, be careful with price increases. Do a competitive analysis and see what your competitors are up to. Are customers loyal (enough) not to switch? One of the tactics that are used often in business is to add an extra tier or product line that has a higher price or margin. Or even launch a new brand.
The second way to have the outcome of your gross profit calculation come out better is to decrease costs of products sold. Lower the variable costs.