Gross Profit Margin, or GPM, is one of the most important numbers on your Income Statement. The GPM tells you how much money is left over from your revenue after accounting for expenses.
In this video…
Hey, Greg here for On Track Business Management. In this video, we’ll be talking about the gross profit margin ratio.
Gross profit margin is the most important number on your company’s income statement or profit and loss statement. Gross profit divided by income equals gross profit margin, or GPM. Gross profit margin shows the proportion of money left over from revenues after accounting for direct costs or job costs, also known as cost of goods sold. Gross profit is before we deduct our overhead expenses. Knowing our gross profit margin lets us know what expenses we can afford.
For example, let’s imagine you’ve been doing all your estimating yourself and you’d like to hire an estimator. That will be an overhead expense. You think you’ll need to pay the estimator $50,000 per year, and your labor burden for the estimator will be 20% for payroll taxes and Workers’ Compensation. At this point, you don’t plan to offer any health or retirement benefits. The labor plus burden will be $60,000. Your company has a GPM of 25%. $60,000 divided by .25 shows you’ll need to increase your sales by $240,000 to cover the cost of the new estimator.
Please visit the On Track website for more ratios that can help you run your business. I hope I’ve convinced you how important it is to read and understand your financial reports. Please take advantage of the free tools posted on the On Track website. Ensuring your bookkeeping is current and accurate is crucial before relying on the financial reports. Garbage in, garbage out.
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