Which of the following is the correct formula for calculating a firms profit?

Skip to contentMenuMenuThe following navigation element is controlled via arrow keys followed by tabMy AccountMy AccountCard AccountAccount HomeRegister for Online ServicesActivate

Which of the following is the correct formula for calculating a firms profit?

Skip to contentMenuMenu

American Express
American Express
American Express
American Express
American Express

The following navigation element is controlled via arrow keys followed by tab

  • My AccountMy Account

Card Account

  • Account Home
  • Register for Online Services
  • Activate a new Card
  • Support 24/7
  • Download the Amex App

Business Accounts

  • American Express @Work
  • Online Merchant Services
  • International Payments for Businesses

Other Accounts

  • International Money Transfers for Cardmembers

Help & Support

  • Forgot your User ID or Password?
  • Security Centre
  • Where can I use my Card?

United KingdomChange Country

  • CardsCards

Personal Cards

  • View Personal Cards
  • View Dollar and Euro Cards
  • Credit Cards
  • Why American Express?
  • Invite friends. Get rewarded.
  • Add someone to your Account

Business Cards

  • View All Business Cards
  • Compare Business Cards
  • Business Platinum Card
  • Business Gold Card
  • Why American Express for Your Business
  • Add an employee to your Account

Corporate Solutions

  • View All Corporate Cards
  • Compare Corporate Cards

Gift Cards

  • View Gift Cards

United KingdomChange Country

  • TravelTravel

Online Travel

  • Book Travel Online
  • Book Fine Hotels & Resorts
  • Book The Hotel Collection
  • Manage My Bookings

Travel Resources

  • Destination Guides
  • The Travel Blog
  • View Travel Rewards Cards

Business Travel

  • Global Business Travel Solutions
  • Corporate Foreign Exchange
  • Small Business Travel

Travel Money

  • Foreign Exchange Services
  • Travellers Cheques
  • Using your Card abroad

United KingdomChange Country

  • InsuranceInsurance

All Insurance

  • Insurance Benefit Centre
  • Insurance Homepage

United KingdomChange Country

  • RewardsRewards

Membership Rewards

  • Shop with your points
  • Travel with your points
  • Latest Membership Rewards offers
  • About the Membership Rewards programme

Other Reward Programmes

  • Cashback Cards
  • Avios Cards
  • Marriott Bonvoy
  • Nectar Points

Offers

  • Amex Offers
  • Invite friends. Get rewarded.

Invites

  • Entertainment

United KingdomChange Country

  • BusinessBusiness

Merchants

  • Merchant Home
  • Accept the Card
  • Manage Merchant Account
  • Contact Us and FAQs
  • Pay with Bank transfer
  • COVID-19 Resource Centre

Business Cards

  • View All Business Cards
  • Business Platinum Card
  • Business Gold Card
  • Business Customer Centre
  • Business Trends and Insights
  • Why American Express for Your Business

Corporate Solutions

  • View All Corporate Cards
  • View All Payment Solutions
  • International Payments for Business
  • Working Capital Solutions
  • Corporate Customer Centre
  • Global Business Travel Solutions

Global Network

  • Home
  • Issuers
  • Acquirers
  • Service Providers
  • Developers

United KingdomChange Country

  • Search
  • HelpHelp

Help & Support

  • Help Centre
  • Online Services Tutorials

United KingdomChange Country

  • Log In
  • My Account
  • Card Account
  • Account Home
  • Register for Online Services
  • Activate a new Card
  • Support 24/7
  • Download the Amex App
  • Business Accounts
  • American Express @Work
  • Online Merchant Services
  • International Payments for Businesses
  • Other Accounts
  • International Money Transfers for Cardmembers
  • Help & Support
  • Forgot your User ID or Password?
  • Security Centre
  • Where can I use my Card?
  • Cards
  • Personal Cards
  • View Personal Cards
  • View Dollar and Euro Cards
  • Credit Cards
  • Why American Express?
  • Invite friends. Get rewarded.
  • Add someone to your Account
  • Business Cards
  • View All Business Cards
  • Compare Business Cards
  • Business Platinum Card
  • Business Gold Card
  • Why American Express for Your Business
  • Add an employee to your Account
  • Corporate Solutions
  • View All Corporate Cards
  • Compare Corporate Cards
  • Gift Cards
  • View Gift Cards
  • Travel
  • Online Travel
  • Book Travel Online
  • Book Fine Hotels & Resorts
  • Book The Hotel Collection
  • Manage My Bookings
  • Travel Resources
  • Destination Guides
  • The Travel Blog
  • View Travel Rewards Cards
  • Business Travel
  • Global Business Travel Solutions
  • Corporate Foreign Exchange
  • Small Business Travel
  • Travel Money
  • Foreign Exchange Services
  • Travellers Cheques
  • Using your Card abroad
  • Insurance
  • All Insurance
  • Insurance Benefit Centre
  • Insurance Homepage
  • Rewards
  • Membership Rewards
  • Shop with your points
  • Travel with your points
  • Latest Membership Rewards offers
  • About the Membership Rewards programme
  • Other Reward Programmes
  • Cashback Cards
  • Avios Cards
  • Marriott Bonvoy
  • Nectar Points
  • Offers
  • Amex Offers
  • Invite friends. Get rewarded.
  • Invites
  • Entertainment
  • Business
  • Merchants
  • Merchant Home
  • Accept the Card
  • Manage Merchant Account
  • Contact Us and FAQs
  • Pay with Bank transfer
  • COVID-19 Resource Centre
  • Business Cards
  • View All Business Cards
  • Business Platinum Card
  • Business Gold Card
  • Business Customer Centre
  • Business Trends and Insights
  • Why American Express for Your Business
  • Corporate Solutions
  • View All Corporate Cards
  • View All Payment Solutions
  • International Payments for Business
  • Working Capital Solutions
  • Corporate Customer Centre
  • Global Business Travel Solutions
  • Global Network
  • Home
  • Issuers
  • Acquirers
  • Service Providers
  • Developers
  • Help
  • Help & Support
  • Help Centre
  • Online Services Tutorials

United KingdomChange Country

  • My Account

Card Account

  • Account Home
  • Register for Online Services
  • Activate a new Card
  • Support 24/7
  • Download the Amex App

Business Accounts

  • American Express @Work
  • Online Merchant Services
  • International Payments for Businesses

Other Accounts

  • International Money Transfers for Cardmembers

Help & Support

  • Forgot your User ID or Password?
  • Security Centre
  • Where can I use my Card?
  • Cards

Personal Cards

  • View Personal Cards
  • View Dollar and Euro Cards
  • Credit Cards
  • Why American Express?
  • Invite friends. Get rewarded.
  • Add someone to your Account

Business Cards

  • View All Business Cards
  • Compare Business Cards
  • Business Platinum Card
  • Business Gold Card
  • Why American Express for Your Business
  • Add an employee to your Account

Corporate Solutions

  • View All Corporate Cards
  • Compare Corporate Cards

Gift Cards

  • View Gift Cards
  • Travel

Online Travel

  • Book Travel Online
  • Book Fine Hotels & Resorts
  • Book The Hotel Collection
  • Manage My Bookings

Travel Resources

  • Destination Guides
  • The Travel Blog
  • View Travel Rewards Cards

Business Travel

  • Global Business Travel Solutions
  • Corporate Foreign Exchange
  • Small Business Travel

Travel Money

  • Foreign Exchange Services
  • Travellers Cheques
  • Using your Card abroad
  • Insurance

All Insurance

  • Insurance Benefit Centre
  • Insurance Homepage
  • Rewards

Membership Rewards

  • Shop with your points
  • Travel with your points
  • Latest Membership Rewards offers
  • About the Membership Rewards programme

Other Reward Programmes

  • Cashback Cards
  • Avios Cards
  • Marriott Bonvoy
  • Nectar Points

Offers

  • Amex Offers
  • Invite friends. Get rewarded.

Invites

  • Entertainment
  • Business

Merchants

  • Merchant Home
  • Accept the Card
  • Manage Merchant Account
  • Contact Us and FAQs
  • Pay with Bank transfer
  • COVID-19 Resource Centre

Business Cards

  • View All Business Cards
  • Business Platinum Card
  • Business Gold Card
  • Business Customer Centre
  • Business Trends and Insights
  • Why American Express for Your Business

Corporate Solutions

  • View All Corporate Cards
  • View All Payment Solutions
  • International Payments for Business
  • Working Capital Solutions
  • Corporate Customer Centre
  • Global Business Travel Solutions

Global Network

  • Home
  • Issuers
  • Acquirers
  • Service Providers
  • Developers
  • Help

Help & Support

  • Help Centre
  • Online Services Tutorials

United KingdomChange CountrySkip to content

DON'T do business WITHOUT IT
DON'T do business WITHOUT IT

Business Cards

Small to Medium

  • View All Business Cards
  • Basic Business Card
  • Gold Business Card
  • Platinum Business Card

Large/Corporate

  • View All Corporate Cards
  • Green Corporate Card
  • Gold Corporate Card
  • Platinum Corporate Card
  • BA Corporate Card
  • BA Plus Corporate Card

Payment Solutions

Supplier Payments

  • Compare Solutions
  • Business Travel Account
  • Working Capital Solutions
  • Buyer Initiated Payments
  • Purchasing Card
  • Meeting Card

International Payments

  • IP Homepage
  • Money Transfer and FX
  • Risk Management
  • FX Exchange Rate
  • American Express Vpayment

Business Class

Business Class

Are you looking for the latest trends and insights to fuel your business strategy? From industry expertise to finance tips, weve got your back.

Industry

  • Digital & Tech
  • Healthcare
  • Manufacturing
  • Professional Services
  • Travel & Transport

Business Size

  • Large
  • Small - Medium

Company Needs

  • Cash Flow
  • International Payments
  • Rewards
  • Travel & Expenses

Special Insights

  • Events
  • News
  • Research
  • Using your Card

Resources

  • Corporate Customer Centre
  • Business Customer Centre
  • Programme Administrator Welcome
  • Contact Us
  1. Trends and Insights
  2. Company Needs
  3. Cash Flow
Business Class

27 April 2021

How to Calculate Gross Profit (With Formula and Example)

Twitter Icon
Facebook Icon
LinkedIn Icon

Article

Summary

Do you know your gross profit margin from your net? This article will help you understand how you can manage your profit margins more effectively to grow your business.

Twitter Icon
Facebook Icon
LinkedIn Icon

If you own a business, monitoring your profit margins regularly will give you the valuable data you need to identify the most lucrative areas of your business and scale them.

"Understanding your profit margins is particularly essential in navigating volatile times," says Claude Compton, founder of Pave Projects, a London-based hospitality group. "Having a deep understanding of your profit margins allows you to be adaptable and pivot at speed, while providing proactive leadership and fact-based decision making."

Here's a look at how to calculate gross profit.

How to calculate gross profit

The gross profit margin calculation measures the money left from the sale of your goods or services, once the operating expenses used to generate them are deducted (e.g. labour and material costs). Gross profit is calculated by subtracting the cost of goods sold (COGS) from the total revenues. Lets look at each of these in more detail.

Cost of goods sold (COGS)

The cost of goods sold refers to all the direct costs and expenses involved in producing or delivering your goods and services. It does not include indirect costs, such as staff salaries or sales and marketing. Below are some examples of COGS:

  • Raw materials or parts needed in manufacturing
  • Direct labour costs associated to production
  • Shipping costs
  • Time spent assisting a client
  • Equipment costs involved in production
  • Utilities for the production facility

Revenue

It is the total amount of income your company generates from the sale of your products or services. It shows you clearly how much money youre bringing in from your total sales. It does not include the costs of running your business, such as taxes, interest and depreciation.

What is the gross profit formula?

The gross profit formula is:Gross Profit = Revenue  Cost of Goods Sold.

What is the gross profit margin formula?

The gross profit margin formula, Gross Profit Margin = (Revenue  Cost of Goods Sold) / Revenue x 100, shows the percentage ratio of revenue you keep for each sale after all costs are deducted. It is used to indicate how successful a company is in generating revenue, whilst keeping the expenses low.

Gross profit margin formula example

As an example of gross margin, a shoe-maker might sell a pair of shoes for £50. They cost £15 to make, yielding the retailer a gross profit of £35. This equates to a margin of 70%.

  • Total product revenue: £50
  • Total production costs: £15
  • Gross profit: 50-15 = £35
  • Gross profit margin: 35/50 x 100 = 70%

Lets take a service-based business. Imagine the company is an accounting firm that audits other businesses. A single audit sells for £500 and costs £100 to produce, yielding a gross profit of £400. This is a margin of 80%.

  • Total product revenue: £500
  • Total production costs: £100
  • Gross profit: 500-100 = £400
  • Gross profit margin: 400/500 x 100 = 80%

Why the gross profit calculation is important

The gross profit margin varies across products and sectors, and is often used to measure the profitability of a single product. It indicates how efficiently you are using your resources to produce your goods or deliver your services.

If a business has a number of projects, or a number of products, then reporting on each separately is a great way to ensure that each component of the gross profit margin is performing as it should be, says Compton. Often, a lower result is due to one or two projects or products not being as profitable as expected.

A strong understanding of your margins in business allows you to make quick decisions to support the growth and resilience of your company. For example, a spike might indicate a new trend that warrants additional investment, whereas a decline might highlight rising expenses, prompting you to analyse your cash flow and make cuts where necessary.

We look at gross profit margins and specific key performance indicators in real-time daily and review in more detail on a weekly basis, says Compton. This regularity allows the business to ride-out changing tides and isolate any issues before they become a long-term problem.

As an example, by analysing your margins, a business will be able to pin-down related price increases due to unexpected economic disruptions.

Marketing costs and the gross profit formula

The gross profit margin formula only includes the variable costs directly tied to the production of your goods or services. Wider company expenses, such as paying for the corporate office, are not included in the final metric. Instead, these expenses sometimes show on an income statement as Selling, General and Administrative costs. These can include the wages of employees such as accounting, IT and marketing as well as advertising and promotional materials. It also includes any rent, utilities or office supplies that are not directly used to create a specific product. This means marketing costs are generally not included in the gross profit formula.

However, just because marketing and other indirect costs arent factored into the gross profit calculation doesnt mean you shouldnt keep a close eye on them too. These costs of doing business affect your cash flow just as much as expenses that are directly related to products and services.

One way to cut down on the time it takes to track these indirect costs is to set up real-time expense reporting so you know whats being spent company-wide, as well as card payment reminders so you know what needs paying and when. You can do both of these things easily using the digital expense management tools that come with the American Express® Business Card.

What is a good gross profit margin?

A study of over 13,000 retailers found an average gross profit margin in retail of about 53%. But this varied widely by product type. For auto and truck manufacturers, the average gross profit margin for the last quarter of 2020 was about 14%. For consulting services it was an average of 96% for the same period.

A high gross profit margin generally indicates youre making money on a product, whereas a low margin means your sale price is not much higher than the cost. But its important to remember that while these figures are a useful reference, margins vary widely by industry and company size.

To learn more about gross profit and how to manage it strategically for business growth read our latest article What is Gross Profit? Everything You Need to Know.

Knowing how to calculate your gross profit margins helps you to better manage your cash flow, ensuring there's always enough money to pay your suppliers and expenses on time. The American Express® Business Card has up to 54 day payment period, giving you more control over your cash flow and when you make your payments¹. Find out more here.

1.The maximum payment period on purchases is 54 calendar days on The Business Gold and Platinum Charge Cards and 42 calendar days on the Business Basic Charge Card, it is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.

2. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available  the Basic Card.

Twitter Icon
Facebook Icon
LinkedIn Icon

Want to Dig Deeper?Company NeedsCash Flow

Get an American Express Card

  • View Cards
  • Credit Cards
  • Dollar and Euro Currency Cards
  • Business Cards
  • Corporate Cards
  • Gift Cards

More Products & Services

  • Insurance
  • Travel Services
  • Membership Rewards Programme
  • International Money Transfers
  • Merchant Services
  • Pay with Bank transfer
  • Form & Document Centre
  • ATM Locator
  • Ways to Pay
  • Frequently Asked Questions
  • Moving Abroad?
  • Financial Hardship & Difficult Times

Company Information

  • About American Express
  • Careers
  • Contact Us
  • UK Inclusion & Diversity
  • UK Modern Slavery Act
  • UK Tax Strategy
  • UK Governance Reporting
  • Get an American Express CardGet an American Express Card
  • View Cards
  • Credit Cards
  • Dollar and Euro Currency Cards
  • Business Cards
  • Corporate Cards
  • Gift Cards
  • More Products & ServicesMore Products & Services
  • Insurance
  • Travel Services
  • Membership Rewards Programme
  • International Money Transfers
  • Merchant Services
  • Pay with Bank transfer
  • Important LinksImportant Links
  • Form & Document Centre
  • ATM Locator
  • Ways to Pay
  • Frequently Asked Questions
  • Moving Abroad?
  • Financial Hardship & Difficult Times
  • Company InformationCompany Information
  • About American Express
  • Careers
  • Contact Us
  • UK Inclusion & Diversity
  • UK Modern Slavery Act
  • UK Tax Strategy
  • UK Governance Reporting

American Express
flag

United KingdomChange Country

  • Website Rules and Regulations
  • Trademarks
  • Privacy Centre
  • Complaint Handling
  • Security Alerts
  • Site Map
  • Accessibility
  • Bank of England Base Rate
  • FX-ECB Comparison (UK)
  • Cookie Policy

Copyright © 2022 American Express Company

Video liên quan