What is Gross Profit?
How to Calculate Your Gross Profit Margin – Step by Step
Gross profit is your net sales (gross sales less VAT/sales tax) minus your Cost Of Goods Sold (COGS, also called Cost Of Sale).
An example to make this easier to understand. Imagine you are a restaurant owner, lets call him Gordon, and Gordon wants to know his gross profit for the month of July (his inventory period) and how to calculate his gross profit.
Step 1: On the morning of 1st July, a count is required of all of his food inventory on hand, say the total value comes to €5,675. This is his opening inventory valuation.
Step 2: Total the purchases/deliveries for the month of July is €22,693 (excluding any taxes)
Step 3: On the morning of the 1st of August, he again counts his inventory. This is the end of the period, ie: his closing food inventory valuation which is €6,490
Step 4: Using the above formula, his COGS calculation is;
= COGS – €21,878
Step 5: So, if Gordon has net sales (excluding VAT/sales tax) of €74,675 for the month, his gross profit is
Gross Profit margin % = 70.7%
The percentage is a percentage of your net sales – so Gordon’s COGS is 29.3% (Gross profit + COGS)
The gross profit margin is then used to pay for rent, labour, and other overheads. Gordon can now decide if his margin is suitable or not in accordance with his overheads and required profit margin. Good practice would indicate that an inventory count should be undertaken monthly to analyse your margin to ensure that its not slipping below the desired margin.
Note: If there are credits received from suppliers/vendors, then these credits are taken from the total purchases figure.
Note 2: If there is wastage, then it is up to the business owner if this is to be credited against the COGS. One could argue that it should and others would say that waste is waste and it is gone. From experience we would recommend that wastage needs to be recorded. If the kitchen team is going to be penalised then they will stop recording the waste.