What is a Gross Profit Rate?

Various metrics determine the profitability of a business.

Gross Profit Rate (GPR), or margin, is calculated using the formula:

{ (Revenue - Cost of goods sold) / Revenue} x 100. It is an effective measure of the profitability and operating efficiency of a business.

Why Calculate it?

GPR is a measure of how efficiently a business prices its products in relation to their manufacturing and selling costs. For instance, a company with a revenue of $1million and a cost base of $750000, will have a GPR of 25% The higher the GPR, the more profitable the business. A GPR higher than zero indicates a profit, less than zero indicates a loss and zero indicates neutrality (break-even). GPRs vary greatly between industries, so it is difficult to recommend an ideal figure for a particular business.

How is it Used?

Apart from determining whether the cost of selling goods exceeds their revenue, GPRs are often used to detect company fraud and accounting irregularities, especially if there are spikes or dips in GPR values.

Improving GPR

The most common approach is to lower costs and/or raise prices. Costs are defined as either fixed (e.g labor, office expenses and rent) or variable (e.g. materials used, supplier and transportation). The latter costs are easier to manipulate.

References

• Dictionary Of Small Business.com
• Accounting For Management.com: Gross Proft Ratio
• Entrepreneur.com: Gross Profit Margin And Markup