Gross Profit Margin Calculator
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UPDATED: Aug 3, 2021
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This gross profit calculator is meant to give small business owners a look into how much money they’re making after factoring in their costs of the product or service they’re selling. It’s easy to see how this would be essential for businesses of any size. While the algorithms are more complex for larger businesses, especially those with multiple products, your financial situation and the future of your business depends on profits. Some businesses don’t make their profits on the base products. For example, Costco makes its profits off membership costs. Especially for small businesses, though, it often comes down to these basic calculations.
By filling out both the total profit brought in through sales and the total cost of whatever product or service a company is offering, users can quickly see the amount of profit (or lack thereof) that they’re generating. This can be factored into calculations with borrowing costs and rates to write a business plan or determine when financing is appropriate.
What Does A Gross Profit Margin Calculation Look Like?
For instance, if a business owner is bringing in $10,000 a month selling a product that he’s paying $6,000 a month to stock, this gross profit calculator will reveal that the owner is making a profit of 40 percent. This calculation should be based on current market conditions and material costs. If material costs change substantially or if profit margin rates are tight, this number should be recalculated to determine the appropriate selling price.
Another way of looking at that percentage is that 40 percent (or 40 cents) of every dollar earned is being put towards the purchase of product.
If the business profit calculation reveals a negative percentage, then a user can immediately see that they’re losing money on the good or service they’re selling. In this case, unless a more complex selling model is being used, the price should be adjusted as soon as possible to reflect actual costs.
For instance, monthly sales equating to $5,000 on a product that costs $6,000 to keep stocked will yield a gross profit margin of -20 percent. In other words, a business owner in this example would be spending $1.20 cents for every dollar earned.
Gross profit calculators are important tools for business owners to determine how profitable a certain product or segment of their company is. If profit is present, then an entrepreneur knows they can afford a new business loan to expand even further. On the other hand, if profit is absent, then taking out a small business loan may be a risky endeavor.
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How Much Can A Business Charge to Support Margin Requirements?
If you’re selling any product, you might wonder how you determine the tolerance for price increases. Of course, one option is to run a market analysis to see how much competitors are charging and the impact on their sales. You might expect business to go down if you charge more, in which case you should calculate total profits compared to costs with a smaller output.
It might surprise some business owners to find out this isn’t always correct. Especially if you don’t have direct competitors, you may have to experiment. In some cases, increasing your price will actually increase your sales. It’s typically a bell curve of price versus sales. As long as prices stay stable, increase, or losses are minimal, you can and should increase your price. When sales decrease significantly, you would want to stop or reassess your total profits.
How Does This Factor into Loans and Base Rates?
If you’re serious about expanding your business or even sustaining it during hard times, you may need a business loan. A margin loan is an option that allows you to borrow using securities you or the business currently own. You should avoid mingling business and personal funds whenever possible. If in doubt, ask a tax professional.
To qualify for a business loan, you’ll need to submit a solid business plan. This could include assessments of your market strength and how you plan to allocate business funds. Depending on the type of business and loan, you may also want to include information about your investment strategy.
If you would like to apply for a business loan after running these profit tests, fill out the application that will be generated in the results below. Keep in mind, if you’re looking for the maximum loan, you may need to supply information about assets that can be used for a margin application.
While loan officers offer rates and a financial product, any business or other professional advice should be sought from experienced financial professionals whose obligation is to help you grow your business. This includes the buying and selling of financial assets, your investment portfolio if that’s part of your business, and more.
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