Business owners and managers often measure their company’s performance by applying mathematical formulas to their financial information. One such formula is the gross profit percentage, which requires information from the company’s income statement.
To calculate gross profit percentage, take the gross sales for a certain period and subtract the cost of goods sold divided by gross sales. For example, a company with $100,000 in gross sales and $85,000 in cost of goods sold has a gross profit percentage of 15 percent.
The gross profit percentage allows companies to figure out what portion of sales is left to pay business expenses. A gross profit percentage of 15 percent means that $.15 of each dollar is left to pay the company’s expenses for the month.
Companies with multiple product lines can apply the gross profit formula to each item, allowing them to discover which products have the highest gross profit. Although simple, it does provide information for business owners and managers to measure financial performance.