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Gross Profit Rate

23.04.2011 08:14:10

Gross Profit Definition

Gross profit is an important term in today’s economy. It means the amount of revenue that a company made over a certain period of time less all the expenses that directly relate to the sales process. These expenses can include the cost of materials and goods production, the cost of services, transportation expenditures, etc. You shouldn’t add in costs such as advertising expenses or interest costs , since they aren’t included to the gross profit value.

A simple formula used to calculate the gross profit is:

Gross Profit = Total Income - Cost of Goods Sold/Materials Used & Other Related Expenses

The amount of a business’ gross profit is very important because it is applied in the calculation of the gross margin . This represents the efficiency of your business and how well your business can get revenue from raw materials as well as produce income.

Gross Margin Definition

Gross Margin is expressed in percentages and is the amount you get when dividing your gross profit by the final price of your products. Then this amount must be multiplied by 100. For example, if you’ve ordered a product for $20 and sold it for $40, the gross profit will be equal to $20. Now, let’s divide this amount by the selling price (which is $40) and multiply it by 100. This is how you’ll get your gross margin that will be 50%.

Understanding the terms ‘gross profit’ and ‘gross margin’ will help you plan your business in advance and cover all the overheads. Therefore, if you know that your gross margin is 50% of anything you sell, you can count on your gross profit and make all business related operations that require certain expenses.

A simple formula used to calculate Gross Margin is as follows:

Gross Margin = Gross Profit / Selling Price x 100

There are other formulas to calculate a company’s gross margin, e.g.:

Gross Margin = Net Sales – Business-related Expenses + Annual Profits You Get from Sales

If you have a high gross margin, this means that your business can turn raw materials into profit more efficiently; therefore, it is an important indicator of your business’ well being.


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