Gross profit margin is a financial index commonly used in many businesses around the world. This is the main and important index that businesses need to consider to maintain profitability in operations. And in the following article, Viindoo will share all information related to the concept, meaning, calculation and ways to manage gross profit margin effectively.
Concept and meaning of gross profit margin
Gross profit margin is a financial ratio used to measure a company's operating performance. It shows the percentage of revenue remaining after subtracting the cost of producing the goods or services sold.
Gross profit margin
Meaning of gross profit margin:
- There are many levels of profitability that analysts monitor to evaluate the performance of a business. These levels include gross profit, operating profit, and net income. Each level provides a different view of a business's profitability.
- Gross profit is the first level of profitability, providing analysts with a view of a company's ability to produce or provide services relative to its competitors.
- Gross profit margin is calculated by dividing gross profit by revenue. This allows analysts to compare different business models with a quantitative index.
- This index shows how much income each dollar of revenue generates. Gross profit margin is a useful indicator when comparing businesses in the same industry.
Formula to calculate gross profit margin
Gross profit ratio is calculated according to the formula:
Gross profit margin = (Gross profit / Revenue) * 100%
In there:
Gross profit = Revenue - Cost of goods sold (COGS)
And in some cases, revenue can be replaced by net revenue. And gross profit margin will be calculated using the formula:
Gross profit margin (%) = Gross profit / Net revenue
Formula to calculate gross profit margin
Ways to improve gross profit margin
Cut production costs:
As a business expands, it can place large orders, establish more favorable payment terms with suppliers, or increase production. These measures help reduce production costs.
Using lower cost raw materials is also a way to reduce the cost of goods sold, thereby increasing its gross profit margin. However, this needs to be done carefully to avoid reducing product quality, causing loss of customers and reduced revenue.
Cut production costs
Expand the scale of production:
To save production costs while still maintaining quality, many businesses choose to expand production scale. This is an effective long-term strategy, helping to reduce average costs for raw materials, machinery, labor and other assets. Expanding scale helps save costs and improve the production capacity of the enterprise.
Expand the scale of production
Adjusting selling price:
During difficult economic times such as inflation, businesses may have to increase selling prices to maintain profits. When raising prices, businesses need to monitor their competitors' prices to avoid losing customers to cheaper options. Increasing prices gradually or giving customers advance notice can help users feel respected. At the same time, customers can also accept the new price more easily.
Adjust selling price
Other profit rate calculation formulas that businesses need to pay attention to
ROS net profit margin
Net profit margin (ROS) represents the ratio of profit after tax to revenue. This index is also known as the return on revenue ratio. The ROS index is used to evaluate a business's business performance by determining the percentage of revenue converted into operating profit.
Net profit margin
To calculate the ROS index, we take net profit (profit after tax) and divide it by net revenue. The specific formula is as follows:
ROS = (Profit after tax / Net revenue) x 100%
In there:
- Net revenue: Actual sales revenue after deducting sales deductions.
- Profit after tax: Is profit before tax minus total tax payable and plus deferred taxes.
Return on assets ROA
ROA is an index that measures how effectively a business is using assets to generate profits. This index represents the amount of profit a business can earn from each dollar of invested assets.
ROA is calculated by dividing profit after tax by total assets. The specific formula is as follows:
ROA = Profit after tax / Total assets
Rate of return on assets
Return on equity ROE
Return on equity (ROE) is a financial indicator that measures a business's ability to generate profits from the capital that shareholders have invested. ROE provides a view of the efficiency of the use of equity capital and allows the success of a business to be compared with its competitors in the same industry.
The following is the formula to calculate ROE ratio:
ROE = Profit after tax / Total equity
Return on equity
Manage profit margins effectively with Viindoo Accounting & Finance
If your business is seeing problems in its business operations and needs to improve its effective profit margin for each project, Viindoo Accounting & Finance is the right choice. Viindoo Accounting online accounting software helps support effective planning. At the same time, the software also helps control data throughout the operating process, transparently and accurately in real time. Therefore, businesses can easily monitor and optimize gross profit margin for each project.
Viindoo Accounting helps businesses effectively control gross profit margins
Special features of Viindoo Accounting include:
- Viindoo Accounting is capable of providing an overall picture of business finances, helping business owners easily control finances
- Automation of accounting activities in businesses helps to significantly reduce errors
- Smart interface, easily solves accounting operations according to Vietnamese accounting standards
- Instant, multi-dimensional data reporting, comparing data according to financial cycles, helping business leaders grasp financial fluctuation trends over months, periods, and years.
Above is all the relevant information gross profit margin that Viindoo have synthesized. Hopefully with the above article, businesses will calculate and manage profit margins more effectively. If you have any questions about the financial management process, please contact us for dedicated answers.