Gross Profit and Gross Margin
Profit margins are the engine of profitability: every unit sold should make a Gross Profit over its costs of sale. This mean that the income you receive per unit should be more than the costs of purchase or production of that unit.
Gross Profit Margin (or just Gross Margin) is your profit presented as a percentage of your income.
You sell a jar of chutney for £3.20 (A: income); you bought the jar for £1.90 (B: Costs of Sales). You have made a Gross Profit of £1.30 (A-B=C: Gross Profit).
You Gross Profit Margin is the profit divided by the income, C/A, as a percentage.
C/A = £1.30/£3.20 = 0.41 = 41%
This is the product Gross Margin, sometimes called the micro-Gross Margin or micro-margin.
Gross margins are equally applicable across your whole department, store or company, and can be over any period of time such as a week,a month, a quarter or a year.
You sell lots of chutney over your first month. You have an income of £12,000, for which your costs of sales was £7,440. You have made a Gross Profit of £4,560.
You Gross Margin is £4,560/£12,000 = 0.380 = 38%.
This is sometimes called your macro-Gross margin or macro-margin, as it relates to your business as a whole.
There is usually a gap between your unit or micro-margin,and your business or macro-margin. This comes about from wastage, product damage, promotions and other operating activities. Minimising your Margin Gap is a key business outcome.
Mark-up is another term encountered sometimes. It compares profit to the cost price of an item. MARK-UP IS NOT THE SAME AS GROSS MARGIN and should never be confused as such. Always be absolutely certain whether you are talking gross margin or mark-up.
Your Mark-up on your jar of chutney is:
C/B = £1.30/£1.90 = 0.68 = 68%
In general you should never use mark-up. It is the equivalent of using pounds and ounces – it used to be popular and does not translate to your wider business. Producers often use mark-up to their customers as the percentage is always bigger (in the above examples, 41% gross margin = 68% mark-up) and it makes lower sales prices look more profitable. Don’t be fooled.
In Delishops we only use Gross Margin, never Mark-up. We recommend you do the same.