profit gross margin net margins cost percent
What Is a Good Gross Profit Margin?Is your business making a sufficient gross profit margin? Do you know whatyour gross profit should be in order to pay overhead expenses and leave anadequate net profit? If not, you should develop a profit plan for yourcompany.#### TL;DR (Too Long; Didn’t Read)Gross profit margins vary by industry. A good gross profit margin is enough tocover overhead and leave a reasonable net profit.## What Is a Gross Profit Margin?The basic structure of a company’s profit and loss statement is as follows:Sales minus cost of goods sold = gross profitThe cost of goods sold is the total cost of labor, materials and manufacturingoverhead consumed to produce a product. Gross profit less general andadministrative overhead expenses equals operating profit before taxes.Subtracting all taxes leaves net profit.## An Example of a Gross Profit MarginSuppose Hasty Rabbit Corporation, a sneakers manufacturer, had total annualsales last year of $985,000. The cost of goods sold was $591,000. Using theformula: sales minus cost of goods sold = gross profit:$985,000 minus $591,000 = $394,000 gross profitAs a percentage, gross profit margin or the gross margin ratio = gross profitdivided by sales.In our example: $394,000 divided by $985,000 = 0.40, or a gross profit marginof 40 percent.Is a 40 percent gross profit margin good for the Hasty Rabbit Corporation? Itdepends.## What Is a Good Gross Profit Margin?Gross profit margins vary by the type of industry. A gross profit margin thatis sufficient for one industry may be woefully poor in another. In general,companies that manufacture products using labor and materials have highergross profit margins than businesses who buy and sell merchandise, such asretailers and wholesale distributors.This doesn’t necessarily mean that manufacturers are more profitable. Grossprofit margins are just one measure of financial performance. Operatingprofits and return on capital are more critical metrics of financial results.Let’s compare the gross profit percentages for a few industries. All figureswill be stated as a percentage of sales for consistency.## What Is the Average Gross Profit Margin for a Manufacturer?As an example, a manufacturer of electrical equipment has an average grossprofit margin of 35 percent. Administrative wages run about 8 percent, and netprofit averages 7 percent. These figures are typical for most types ofmanufacturers.## What About the Gross Profit Margin for a Retailer?Let’s start with grocery stores. They have gross profit margins in the rangeof 26 to 30 percent and a net profit margin that has averaged 2.3 percent inrecent years. Their highest single expense other than cost of merchandise iswages, at 10 percent. Rent is around 2 percent of sales.While the net profit margin for grocery stores may seem low, remember thattheir business is buying merchandise at wholesale prices and reselling at amarkup. The inventory turnover rate for a grocery store is very high comparedto other industries, so their total sales are equally high. As a result,grocery stores still earn a respectable 18 to 20 percent return on net worth.Clothing retailers have higher gross profit margins in the range of 48 to 50percent. They need high price markups because they frequently have to puttheir merchandise on sale with discounts from 20 to 50 percent off the fullprice.## What Is the Gross Profit Margin for a Restaurant?Full-service restaurants have gross profit margins in the range of 35 to 40percent. As a rule of thumb, food costs are about one-third of sales, andpayroll takes another third. Net profit margins are from 3 to 5 percent. Awell-managed restaurant might net closer to 10 percent, but that’s rare.Business owners start out by designing a plan that details how they intend tomake a profit. This includes determining a good gross profit margin for theirindustry that is sufficient to cover general and administrative expenses andleave a reasonable net profit.