A margin calculator can greatly affect your business' success. It sounds wild, but it is true. Shortly, you will learn exactly how.
But first, let us talk about Henry Ford (of blessed memory), and the rather interesting way he transformed Ford Motors.
Experts and stakeholders had tried all they knew to improve the gross profit margin at Ford. Still, year after year, the turnover came back low. Then in January 1914, Henry Ford came up with something crazy. He started a "profit-sharing" method by paying his workers $5 a day. Back then, $5 a day meant about twice the minimum wage, so it was a big deal. Not to mention that $5 is like $149 today. Ford's profit margin has never been the same, to date.
What Henry did began what would become the work compensation revolution across many industries. But that is probably not what he had set out to do. He had wanted to make more profit, just like every other person in business, just like you. In fact, profit-making was his lifelong policy. No wonder one of his most famous business tips of all time is "business must be run at a profit, else it will die."
Why Do You Need a Good Gross Margin Calculator?
As Henry Ford recommends, every business should work at making more profit. Even more so now that digital marketing has made successful entrepreneurship much easier. Here is why you need a good margin calculator.
- You cannot improve your profit turnover if you don't even know your current EXACT profit margin.
- The wrong profit margin can make you blind to the places where your business needs improvement. Nothing could be more damaging for a business than a false sense of progress.
Thus, if you use the wrong margin calculator, you will get the wrong figures. Your business is in trouble if you have the wrong margin figures.
It is important to understand the differences between some of the terms you use in your business. That way, you avoid the risk of mixing up the figures.
Key Differences Between Gross Profit, Profit Margin, and Gross Profit Margin
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Your gross profit is the amount you have left after you deduct production and selling costs from the profit you made. In other words, the gross profit is the money left after all production expenses.
On the other hand, the profit margin is the general term for assessing a business's profitability. There are three kinds of profit margins: net profit, operating profit, and gross profit. The net profit is the overall profit left after all the organization's expenses are removed from the profit. The operating profit is after operating costs are removed from the organization's income.
The gross profit margin is the amount your profit is higher than your production cost. When calculating gross profit, you do not include expenses such as taxes, equipment maintenance (generally called 'overhead costs'), or debts. However, items like raw materials and wages for the workforce are calculated jointly as the Cost of Goods Sold (COGS).
There is one significant difference between gross profit and gross profit margin. The gross profit calculates the amount made after costs, while the gross profit margin calculates the percentage profit made for each of the goods sold.
As you will soon see, the average gross margin calculator can do it with a few clicks. Still, it is safer for you to know how to calculate profit margin. On some days, you may need to do some quick numbers by yourself. Here are the formulas you should use on such days.
Gross Profit Formula
To find your gross profit, you subtract the Cost of Goods Sold from the total revenue made from the goods. The gross profit formula therefore is:
Gross Profit = Total revenue - Cost of Goods Sold
For instance, say you own a bread production factory. You spent $2000 last month buying the ingredients for making and packaging the bread. That is your production cost. If you sold bread worth $3500 in the same month, that is your revenue.
Your gross profit for last month would therefore be:
$3500 - $2000 = $1500
3 Things You Need to Accurately Calculate Gross Profit
Without these three things, you will not get the correct gross profit figure.
- Proper Bookkeeping
- Proper Inventory mobile-website-bui
- A good calculator
1. Proper Bookkeeping
Getting the right gross profit figure begins way before you need a margin calculator. To get the right figure, your business must have a keen, no-cent-missing record system. If you are a business owner, ensure that you have a trustworthy person handling your business bookkeeping. That is, of course, if you cannot do it yourself.
It is important to mention here that you need to be disciplined in spending if you will keep accurate records. Bigger businesses have the advantage of structure, so it's easy to keep everyone accountable. If you are a small business owner, avoid spending your business money for personal use. That is one way to see that money goes unaccounted for. If you can help it, don't even borrow business money. You will likely never put it back.
Nowadays, there are software and apps that make bookkeeping much easier. Some of them are designed to handle only bookkeeping. However, others can serve you in many different ways for your business. For example, Zoho is a Customer Relationship Management (CRM) app that keeps financial records. Wave Financial is especially unique because it comes with an inbuilt margin calculator.
2. Proper Inventory
It is equally important to keep a record of how many products you have at any given time. When you constantly cross-check available goods with current income, it will be easier to track where the money goes.
Again, for most digital businesses, cloud-based inventory management has become a big deal. If yours uses one of such, make sure whoever is in charge of that knows exactly what they are doing. Remember, you need razor-sharp accuracy.
3. A Good Margin Calculator
If you have absolute trust in your math skills, you can calculate manually. Then again, why go through all that stress? Good ol' Microsoft Excel can do that for you. Or a margin calculator. All you need is the correct records. These days, many free online business websites, like Strikingly, automatically record all your transactions. No matter what template you choose, Strikingly allows you to add this eCommerce feature to your website.
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Gross Profit Margin Formula
To get the gross profit margin, you divide the gross profit by the revenue and then multiply the total by 100 to get the ratio. We established earlier that your gross profit is Revenue - Cost of Goods Sold. Therefore, the gross profit formula is:
(Revenue Amount - COSG) ÷ Revenue Amount) × 100
Let us apply this formula step by step, shall we?
How to Calculate Profit Margin
Here is how to calculate profit margin in 3 simple steps:
- First, find your gross profit (Revenue - Cost of Goods Sold)
- Then, divide the gross profit by the revenue (calculate the margin)
- Lastly, multiply the result by 100 (calculate the ratio)
Remember your bread factory? Recall that you made $3500 in revenue last month. Your COGS was also $2000. Applying the gross profit margin formula, your calculations would look like this.
Firstly, find your gross profit.
Revenue - COGS = $3500 - $2000
That is $1500
Next, divide the gross profit by the revenue
$1500 ÷ $3500 = 0.428
Lastly, multiply the result by 100.
That is 0.428 × 100 = 42.8.
Therefore, your last month's gross profit margin ratio is 42.8%
What You Need to Accurately Calculate Gross Profit Margin
Just like in the gross profit, you will need properly kept records and if you like, an excellent margin calculator. Additionally, your profit margin is derived from other figures. That is the revenue and cost of goods. Thus, you must ensure you get the other figures right if the gross profit margin is correct.
Best Online Gross Margin Calculator
The online gross margin calculator makes the calculation process much more manageable. It is an auto-calculator programmed with formulas that produce results once you input relevant figures.
If you run an online store, this margin calculator is a 'handy' tool for you. Usually, it comes as part of an eCommerce website or as complete software. If you are building your eCommerce website, you can have a built-in margin calculator. Also, some e-commerce platforms have already provided one for their users. As a seller, you only have to register with the platform and list your items.
Shopify is one e-commerce site that does this. For sellers on Shopify, the platform automatically records your transactions, tracks your cash flow, and keeps track of your profits. You can request a breakdown of your business’ numbers with a few clicks. Regardless, the Shopify margin calculator is available to you, even if you do not use the platform to sell. It is free too.
Best Free Gross Margin Calculators
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- Calculator Soup
- Omni Calculator
Oberlo: It has a bright interface, and it is easy to navigate. It can calculate margins and other complex figures in less than 3 seconds.
Calculator Soup: This online calculator solves profit margins and much more. It also helps you convert money to time, compute your mortgage plan, and solve simple math problems. A go-to calculator for both business and personal use.
Omni Calculator: Yet another versatile calculator. It helps with all kinds of business and personal finance computation. You can even monitor your weight and Body Mass Index with it.
If you already run a business, a gross profit margin calculator may be the next hack to fasten your business growth. Even if you do not have one, you can start one now that you know about the profit margin and margin calculator. It's easy. Begin by building your website or creating your eCommerce platform with Strikingly.