The Gross Profit Margin ratio is a very important profitabilty ratio used widely in all industries and businesses and it is very important to a small business owner like Ryan because it gives him a very clear idea of what kind of cushion a small business has after it has paid for its cost of goods sold. This cushion is what determines the profitablity of a company and the next item that is subtracted from the Gross Profit to get to the operating income is of course the operating expenses. Thus having a good Gross Profit Margin ratio is critical to all small businesses.
Since Real Estate Funding Solutions is a service business that does not have any cost of goods sold, the gross profit number is the same as the sales number for the firm. Thus in this case the gross margin is 100% for all the three years of 2012, 2013 and 2014 given that there is no cost of goods sold. It is important to understand however that if the firm were to partner with another mortgage broker on many financings, and had to pay out a certain percentage of the income to the other broker, they would see a cost of goods sold. For example if Real Estate Funding Solutions were to close five complex mortages that were referred to them by ABC Mortgages and the total sales from these transactions resulted in an income of it would be paying that amount to ABC Mortgages.
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