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…
The GPM is an important ratio to know in accounting for construction because it tells you how much you can afford to spend at any given moment in time. This video explains what the GPM is, and how it can help you make business decisions.
What is the Gross Profit Margin?
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 calculated before you deduct overhead expenses. Knowing your gross profit margin lets you know what expenses you can afford.
Can You Afford to Hire a New Employee?
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.
Other Ratios to Help You Run Your Business
The GPM is an important ratio, but there are others that you shoul know about as well. Here are several ratios that can help you run your business, along with handy calculators so you can get your answers right away.
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