Gross Profit (GP) Percentage Calculator
What is Gross Profit Percentage?
Gross Profit Percentage (GP%) is a financial metric that represents the proportion of money left over from revenues after accounting for the Cost of Goods Sold (COGS). It is a vital indicator of a company's financial health and production efficiency. Unlike net profit, gross profit only considers variable costs directly associated with producing goods or services.
The Gross Profit Formula
To calculate the gross profit percentage manually, you first need to determine the gross profit amount and then divide it by the total revenue.
GP Percentage = (Gross Profit / Total Revenue) x 100
Example Calculation
Imagine a retail store that sells a designer jacket for $500. The store purchased that jacket from the manufacturer for $300 (this is the COGS).
- Gross Profit: $500 – $300 = $200
- GP Percentage: ($200 / $500) x 100 = 40%
In this scenario, the store retains 40 cents for every dollar of revenue to cover operating expenses and net profit.
Margin vs. Markup: Knowing the Difference
It is common for business owners to confuse GP Margin with Markup. While they use the same basic numbers, the denominator changes:
- Margin (GP%): Calculated as a percentage of the Selling Price.
- Markup: Calculated as a percentage of the Cost Price.
Using the example above, the Markup would be ($200 / $300) x 100 = 66.67%. Understanding this distinction is crucial for setting prices that ensure sustainability.
Why Monitoring GP Percentage Matters
Tracking your GP% over time helps identify trends in your business. A declining percentage might indicate that your suppliers have raised prices, or that you are discounting your products too heavily. Conversely, an increasing GP% suggests higher efficiency or stronger pricing power in the market.