What is gross profit margin?

Gross profit margin (definition)

Gross profit margin is the percentage of sales income you have left after paying for the stuff you sold.

A lot of your sales income will go straight back out the door to pay for the goods or services you provide. Gross profit margin is the portion left over. Some of it will be used to pay for operating expenses like rent, office supplies, and loan repayments. The rest becomes your net profit.

Gross profit margin formula shows that gross profit divided by revenue, times 100, equals gross profit margin.

Gross profit margin shows what portion of sales income you can keep in the business

Calculate your business’s gross profit margin with our gross profit margin calculator.

Whereas gross profit is a dollar amount, gross profit margin is a percentage. A low gross profit margin makes it harder to cover other expenses like rent and energy. And, in turn, it reduces your chances of making a net profit.

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Disclaimer

This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.