small business profit – GoForth Institute Blog | Canadian Entrepreneur Training

Calculating your small business’ gross profit margin

Your gross profit margin lets you compare your proposed business to operating businesses in your industry. It’s an assessment of your company’s financial health found by calculating the proportion of profit you have left compared to your daily sales. Here’s how to find this important figure.

How to calculate your gross profit margin

To calculate your gross profit margin, you’ll need to know two other figures first.

One of the figures you’ll need is your cost of goods sold.

Cost of good sold, or COGS, is the price you paid to acquire the products that you’ll sell to your customers in retail/wholesale businesses, or the cost of the raw materials, labour and supplies in manufacturing businesses.

Most small businesses use the following formula to calculate their COGS expense:

Value of goods inventory at the beginning of the period
+
Value of any goods purchased for resale during the period
–
Value of goods inventory at the end of the period
=
The cost of goods sold during the period

Then, you’ll need to know your total estimated daily sales. Two methods of forecasting sales are the daily capacity method and the market share method.

Now that you have those figures, here’s how to calculate your business’ gross profit margin.

First:

Total estimated daily sales
–
Cost of goods sold
=
Gross profit

Then:

Gross profit
÷
Total estimated daily sales
x
100
=
Gross profit margin

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How to calculate your gross profit margin

Your gross profit margin is an assessment of your company’s financial health found by calculating the proportion of profit you have left compared to your daily sales. This measure of profit lets you compare your proposed business to operating businesses in your industry.

How to calculate your gross profit margin

To calculate your gross profit margin, you’ll need to know two other figures first.

One of the figures you’ll need is your cost of goods sold.

Most small businesses use the following formula to calculate their COGS expense:

Then, you’ll need to know your total estimated daily sales. Two methods of forecasting sales are the daily capacity method and the market share method.

Now that you have those figures, here’s how to calculate your business’ gross profit margin.

First:

Total estimated daily sales
–
Cost of goods sold
=
Gross profit

Then:

Gross profit
÷
Total estimated daily sales
x
100
=
Gross profit margin

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How to conduct a break-even analysis

A break-even analysis is a tool used by small business owners to calculate the amount of sales needed to cover all costs – the point when they break even. This can also be used to determine how much of an increase in sales you’ll need to cover your cost increase, and may be used when deciding whether or not to launch a new product. We’re looking for the point where Total Revenues are equal to Total Costs.

Here is the formula to calculate your small business’ break-even point:

Total Fixed Costs ÷ Contribution Margin Per Unit: (Unit Sales Price – Unit Variable Costs)

To use this formula, you need to know the sales price of your product or service, per unit. For example, let’s say you own a screen-printed t-shirt small business. The sales – or unit – price of one of your t-shirts is $20.00. You’ll also need to know the costs which vary with the amount of business you do, per unit, of your product. For example, the variable cost of a t-shirt, including materials, utilities and labour wages, is $5.00 per t-shirt.

Next, you want to subtract the variable cost per unit from the sales price to give you the contribution margin per unit. So, $20.00 – $5.00 = $15.00.

Now, to get the total fixed costs number, you must know total fixed operating expenses (costs that stay the same no matter how many t-shirts you make). Let’s say the fixed costs of your t-shirt shop, including rent, taxes, insurance, and all other unchanging costs that must be paid to keep your business running, amount to $10,000.

Now that we have all of our numbers, let’s plug them into the formula to determine the break-even point, or the number of t-shirts you have to sell to cover your costs.

$10,000 ÷ $15 = 666.67, or 667 t-shirts per year rounded up

If you need to sell 667 shirts a year to break even, how many shirts will you have to sell each day? Let’s assume your store is open six days a week, or 312 days per year. You would need to sell 2.13 t-shirts per day, calculated as follows:

667 ÷ 312 = 2.13, or three shirts per day rounded up

For your t-shirt company to make a profit, 667 t-shirts must be sold per year. The income from these 667 t-shirts will cover the costs of making them, and the sale of the 668th shirt will result in a profit. As a small business owner, try to keep your fixed costs down. The higher the fixed costs, the higher your break-even level of sales will be and the harder you’ll have to hustle!

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