Effective Gross Profit Improvement

Gross profit is a financial measurement of how much money a company makes after deducting the cost of goods sold from sales. To effectively improve this figure, companies must increase sales or decrease the cost of goods sold.

Formula

Assume a company generates $120,000 in sales for the month with cost of goods sold totaling $70,000. The gross profit is $50,000; to figure this number as a percentage, divide gross profit by total sales. Therefore, the percentage is 42 percent, indicating cost of goods sold accounts for 58 cents of every dollar.

Features

Reducing the cost of goods sold can be an effective way to improve gross profit. Using cheaper materials to produce inventory, implementing a more accurate product costing system and reducing wasted materials are ways to lower this business cost.

Considerations

Vilfredo Pareto, an Italian economist, created the Pareto principle, which states that 20 percent of a company's operations are responsible for 80 percent of results. Owners and manages needs to identify which 20 percent creates the bulk of their results and focus on lowering these costs or increasing sales in this area. For example, focus on the 20 percent of customers responsible for sales revenue, rather than the 80 percent who are not.

References

• Investopedia: Gross Profit
• Investopedia: The Bottom Line On Margins
• Ball State University: Pareto's Principle: The 80-20 Rule