Page 125 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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Gross Profit Margin
Gross profit is the amount of money earned from selling the
product or service and paying the actual costs of making the
product or providing the service, as we discussed in Chapter 4.
Gross profit margin (or simply gross margin) converts that
amount into a percentage of gross revenue. We’ll use the
income statement from Chapter 4, Figure 4-1, for illustration
purposes:
Gross Profit = 175,000
Gross Sales 650,000 = 26.9%
Gross margin is an important number because, as noted
previously, keeping a company profitable requires that it make
a profit on what it sells, before costs of marketing and adminis-
tration. Watching this metric over time is critical, because there
are so many components that typically affect it that cannot be
controlled or managed easily. The amount of employee over-
time spent to rush a past
due order out the door
Gross profit margin affects gross margin, as
Gross profit (net sales
minus the cost of goods does the cost of reworking
a manufactured part
sold) as a percentage of sales or rev-
enue.Also known as gross margin. because an inexperienced
worker spoiled it.
Net Profit Margin
Net profit is the amount of money the business has earned after
selling its products and paying all the expenses of the business.
This is the actual “bottom line.” Net profit margin converts that
amount into a percentage of gross revenue, which, referring
again to the income statement in Figure 4-1, looks like this:
Net Profit 19,200
= = 3.0%
Gross Sales 650,000
Net profit margin presents interesting analysis opportunities.
By itself, it doesn’t tell you much about the profit performance
of a business. A net profit margin of 3% in a mature software or
drug manufacturing business would be pretty awful, but the