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Gross Profit measurement and why you need to know what it isContinuing our series of blogs on breaking down financial reports, using simple easy to measure ratios, let’s take a look at gross profit margin. Gross profit margin ratio really only applies to businesses that sell goods by creating a product such as restaurants creating meals or builders constructing property and so on. The gross profit is worked out by first getting your total sales figures for the period you want to look at. Next, you need to determine your total direct costs for those products you’ve sold. These are the direct materials used in creating your final product only. (Do not include general business expenses such as rent or telephones as these are administrative expenses.) As an example, if a Subway franchise spends $18,000.00 on food materials and has sales of $55,000.00 for the month then you would work out the gross margin as follows:- Gross Profit = $55,000.00 - $18,000.00 = $37,000.00 ($37,000.00/$55,000.00) = 67.27% In this case the gross profit margin for the month is 67.27%. What does all this mean and why is gross profit margin important to my business, I hear you ask?
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