How to calculate the percentage of profit from sales
Learning how to calculate the percentage of profit from sales is the cornerstone of the financial management practices of all good business ventures.
Understanding profits and profit margin is crucial for entrepreneurs and business decision makers to reach the end goal. Which is to make money to continue and grow the business. This applies whether it is a small business owner who starts his activity from home or even a high-level CEO who runs a multi-billion dollar global company.
Here comes the task of calculating the percentage of profit from sales (also called the gross profit margin):
Determine net sales. A company’s net sales are equal to all sales minus returns, allowances for damaged goods, and discounts. This is a more accurate measure than just total sales.
Determine costs of goods sold. This includes the commissioning of manufacturing materials, labor, and other costs directly related to the production of goods or services.
How to calculate the percentage of profit from sales
Profit from sales can be expressed by the following relationship:
Profit from Sales = Sales Revenue (Sales Price) – Production Costs
Profit from sales can be explained as the percentage of profit from sales as follows:
Sales Profit Ratio (%) = (Net Sales Income – Cost of Sales) / Net Sales Income
Example: A company that sells goods for 4,000 and the cost of the goods is 3,000, so the percentage of profit from sales is 1/4 = (4000 – 3000) / 4000 or 25%.
Gross Profit vs Gross Margin
Avoid confusing gross profit with gross profit margin. Gross profit equals net sales less cost of goods sold. The above formula converts gross profit to gross profit margin in percentage form to make it easier to compare it to past performance or to other products.
Investors look at your gross profit margin to see how efficiently your company uses its resources. If one company has a profit margin of 10% and another has a profit margin of 20%, this means that the second company is making twice as much profit as the first. Assuming that the other costs are approximately equal, there is no doubt that the second company will be better than the first. It is better to compare two companies in the same sector. Some products and services have a lower average gross profit margin than others.
How to improve the percentage of profit from sales
To get a higher profit margin, you may need to make some changes. You need to cut costs and increase sales to improve profit margin.
To cut costs:
- Cut down on offers that don’t sell. These items take up space and don’t turn into dollars.
- change of sellers. Shop around to see if you can get a better deal from a different seller.
- Waste reduction. Don’t buy unnecessary items, and reduce business expenses by looking for alternative solutions to current operations, such as creating a paperless office.
To increase your sales:
- old stock. Get rid of old inventory by selling items at a lower price.
- Increase your prices. If you’ve used the same pricing strategy since day one, it’s time to increase your pricing to match your experience.
- Try to keep customers. Attracting new customers is costly compared to the cost of maintaining an existing customer base. Try to use customer retention strategies along with new customer acquisition strategy.
For any business to be successful, it has to make enough money to make a profit, and earn enough to keep the business thriving, for the owners, employees, shareholders, and ultimately society as a whole.
In order to ensure the viability of your business, you need to measure its performance. This is done through one indicator, which is the calculation of the percentage of profit from sales.