Gross Profit Margin

The difference between the sales price and the cost of the product or service rendered is known as gross profit margin in business. It is traditionally the amount identified on the income statement or a tax return as the amount earned after cost of sales a.k.a cost of goods sold, cost of services rendered, etc. is subtracted from sales (revenue).

Sophisticated entrepreneurs realize there is more to this value than simply stating sales less cost of sales. This is because each industry from all the various sectors define both sales and cost of sales differently. Many small business retail stores will define cost of sales as the cost of the item sold. Whereas Wal-Mart will define cost as everything from distribution costs, storage, product cost, store labor and store operations in their definition of cost of goods sold. Wal-Mart’s gross profit margin might run 19% whereas the small business retail store may have 60% profit margins.

One of the most common uses of the gross profit margin in reading reports is as a ratio in business. It is used as the percentage of sales in

© 2017 – 2022, David J Hoare MSA. All rights reserved.