Home   House Cleaning Service   Free House Cleaning Service Business Plan   8.8 Gross Profit Margin Analysis

8.8 Gross Profit Margin Analysis

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 owners like Felix & Michael because it gives them 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 business 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 like Central Plumbing and Heating

The Gross Profit Margin ratio is a very important profitability ratio used widely in all industries and businesses and it is very important to a small business owners like Anthony, Christine and Sofia because it gives them 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 profitability 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 Spotless Homes 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 2015, 2016 and 2017 given that there is no cost of goods sold. It is important to understand however that if the firm were to partner with another contractor on a particular job, and had to pay out a certain percentage of the income to the other sub-contractor, they would see a cost of goods sold. For example if Spotless Homes were to work on a large contract for cleaning an office complex working with ABC Cleaning and the total sales from these transactions resulted in an income of $100,000 with the proceeds being split evenly between both firms. the cost of goods sold for Spotless Homes would be $50,000 since it would be paying that amount to ABC Plumbing. Thus in this instance the gross profit margin for Central Plumbing and Heating would be 50%.

In order to be realistic however, instead of using the gross profit for this calculation, we have simply entered in the Profit before Interest & Taxes to calculate the Gross Profit margin. This analysis will of course produce the same result as the operating profit margin ratio covered in the previous section.


Quick Links:

  1. Go to the Corresponding Template section for this industry.
  2. Go to the Corresponding Questionnaire section for this industry.

Small Business Owner Resource Center

Articles

Articles on the Small Business Financing Sources, the Small Business Loan Basics, small business loans Checklist and SBA Loans are incredible sources of knowledge for the small business owner.

 

Articles

Credit Report and Credit Score Analysis, how to Read a Personal Credit Report and all about Business Credit cover the intricacies of credit and are required reading for everybody.

 

Articles

The Foundation Grant Directory is a free listing of sources for grants by state. Why not look if there is some free money out there for your business. Hey - you never know!

 

Articles

The Business Loan Application covers every item you will need in your loan package and tells you how to get approved for business loans.

 

Articles

Fire your loan broker and use our Free Business Loans Bank / Lender Directory to find every bank in the country lending to small businesses.

 

Articles

If you are looking to start a business - look no further.  Check out the Free Incorporation Guide discussion and the State Incorporation Resource Directory.

Rate this page
Your feedback is important to us | Please rate this page
1 2 3 4 5
HELP US SPREAD THE WORD | LINK TO THIS PAGE