This metric is usually expressed as a percentage of sales and is also known as the gross margin ratio. Gross profit margin is a financial metric used by analysts to assess a company’s financial health. Gross profit margin divides that by revenue and multiplies it by 100% to give a percentage. The businesses with the highest profit margins are typically service industries like law, banking, and software development.

Download CFI’s Excel template to advance your finance knowledge and perform better financial analysis. However, this must be done competitively – otherwise, the goods would be too expensive and fewer customers would purchase from the company. The remaining amount can be used to pay off general and administrative expenses, interest expenses, debts, rent, overhead, etc. As Microsoft Inc. and Apple Inc. are in similar fields, we would be able to compare these companies.

For example, in an IT professional services firm, hours spent by a consultant configuring a client’s ERP system or conducting project stakeholder workshops are billable. Internal activities, such as administration, training, sales support, recruitment, and general meetings, must be excluded to ensure accurate measurement. The first step involves defining billable hours, which includes time directly chargeable to clients for consulting, implementation, or advisory services. It involves distinguishing between strategic, billable, and non-billable work, such as internal initiatives, meetings, training, and administrative tasks.

You can multiply this number by 100 to arrive at a percentage, which is 50.98%. The inputs needed for this calculation can be found on a company’s income statement, which is part of its 10-Q or 10-K filing. To express this number as a percentage, simply multiply it by 100. Both views provide insights into different aspects of the company’s operations. However, keep in mind that other factors can impact this figure, such as industry, company size, and other external factors.

When to Use Contribution Margin Analysis

Billable utilization affects revenue by increasing the share of available consultant time that is billed to clients. Having established the difference, let us explore its impact on business profits. Now that we have learned about the ideal billable utilization rate for firms, let us move on to understanding the differences among key utilization concepts.

The gross margin is an easy, straightforward calculation that provides insights into profitability and performance. The gross margin provides insights into a company’s financial health. While the gross margin only accounts for a company’s COGS, the net margin accounts for COGS plus all indirect, interest, and tax expenses. The best way to evaluate a company’s gross margin percentage is to analyze the trend over time and compare it to peers or the industry average. In general, the higher the gross margin, the more revenue a company retains per dollar generated. It’s considered the best way to evaluate the strength of a company’s sales performance by assessing how much profit is generated compared to the costs of production.

• These produce or sell goods and services that are always in demand, like food and beverages, household products, and personal care products.
• For a product business, this includes materials, manufacturing costs, and direct labor.
• The formula to calculate billable vs. non-billable hours is as follows –
• Suppose a retail business generated $10 million in revenue, with $8 million in COGS in the fiscal year ending 2023.
• Reduce waste and automate your processes to cut costs and boost profit margins.
• Now that we have understood what billable utilization is, let’s delve into its core benefits.
• Enter the revenue earned from a particular product or service and the costs of providing that product or service (known as cost of goods sold).

Professional Service Automation

This is its gross revenues minus returns, allowances, and discounts. This can be a delicate balancing act, requiring careful management to avoid losing customers while maintaining profitability. It’s the profit remaining after subtracting the cost of goods sold (COGS). FreshBooks expense tracking software makes it easy to upload and categorize expenses so you can track how much your business is spending on different elements. Assess which products deliver the best profit and consider whether you could cut poorly performing products and focus on more profitable ones.

Regular reviews and accurate financial statement reporting are important practices for you to make decisions and drive improvements based on reliable data. The most meaningful benchmark is often a business’s own historical performance and that of close competitors. What’s considered healthy varies widely by industry, business model, and competitive environment. Understanding which factors drive margin movements is critical to take effective corrective action. Sudden changes often warrant immediate investigation, while gradual shifts may indicate structural changes invoice online or on the go in the business model.

• This is why the net margin is considered the most comprehensive profitability metric and is very useful alongside gross margin when evaluating a company.
• A higher gross profit margin means your business operates more efficiently and has more funds available for growth.
• The gross profit margin formula is a simple way to see how much profit you make on the products or services you sell.
• One way to reduce costs is by streamlining processes and eliminating inefficiencies.
• This transparency helps managers detect patterns of over- or underutilization and implement measures to improve resource allocation decisions and enable optimal utilization.

Prevents revenue leakage and boosts cash flow When managed strategically, it transforms existing capacity into predictable financial outcomes without increasing headcount. SAVIOM’s What-If Analysis enables firms to simulate and compare multiple resource scenarios to come up with the most profitable outcome. Gain real-time visibility into resource utilization trends and maintain an optimal resource health index  using SAVIOM’s advanced resource management software.

Gross profit margin measures the percentage of sales revenue that exceeds your cost of goods sold (COGS). As an example of how to calculate gross margin, consider a company that during the most recent quarter generated $150 million in sales and had direct selling costs of $100 million. The higher the gross margin, the more revenue a company has to cover other obligations — like taxes, interest on debt, and other expenses — and generate profit. Put another way, gross margin is the percentage of a company’s revenue that it keeps after subtracting direct expenses such as labor and materials.

Professional Services

Delve into real-world scenarios with case studies showcasing businesses that successfully optimized their gross margin percentages. Your gross margin percentage is a cornerstone of financial planning. The ratio of a company’s gross margin to its revenue To understand the sales gross margin formula, it is important to understand a few other concepts around it such as gross sales, cost of goods sold, and net sales.

Clarifying Gross Margin vs. Profit Margin

By monitoring this metric, organizations can improve scope control, protect margin integrity, and boost ROI. It provides visibility into whether recorded billable hours are fully invoiced or reduced due to write-offs, discounts, or scope misalignment. This transparency helps managers detect patterns of over- or underutilization and implement measures to improve resource allocation decisions and enable optimal utilization. The formula to calculate billable vs. non-billable hours is as follows – Check out our blog on utilization report and how to create it.

Take the headache out of growing your software business

Another way to interpret a gross margin number is to compare it to the sector average and top competitors during the same period, such as annually or quarterly. However, this is not a significant figure and means the gross margin was little changed. As determined previously, PG’s gross margin for the quarter that ended on March 31, 2025, was 50.98%. Companies can use gross margin as a guideline to improve their operations and adjust pricing strategies.

If margin is 40%, then sales price will not be equal to 40% over cost; in fact, it will be approximately 67% more than the cost of the item. If markup is 30%, the percentage of daily sales that are profit will not be the same percentage. Markup expresses profit as a percentage of the cost of the product to the retailer.

It can be used to (1) evaluate profitability, (2) help set pricing, and (3) make comparisons between peers. Over time, these efficiencies compound to strengthen profitability. Tools like financial analysis software can improve this process by providing real-time insights, visual trend analysis, and deeper drill‑downs into cost drivers. Clear cost definitions and consistent reporting periods are essential for reliable margin analysis. It represents the total amount left after subtracting COS from revenue. Gross profit can increase simply because sales volumes grow, even if efficiency worsens.

Watching trends in gross margin can highlight potential problems in your supply chain or customer retention processes. From this one number, a service can determine how much it costs to deliver the service and how much revenue is coming in. Margin and markup refer to the same thing – your gross profit – but from different perspectives. The gross margin calculator does the rest. Enter the revenue earned from a particular product or service and the costs of providing that product or service (known as cost of goods sold). Xero serves up the numbers you need to track profits and manage your margins.

Gross profit is the dollar amount left after subtracting cost of goods sold from revenue. Your margin must cover operating expenses, taxes, and provide profit for growth. Make sure you use your net revenue figure, which is your gross sales minus any returns, allowances, or discounts. Revenue is the total amount of money your business brings in from sales before any deductions. For a service business, COGS typically includes the direct labor costs and any materials used to deliver the service.

Company XYZ could lose both gross margin and market share in this case. Then divide this figure by the total revenue for the period and multiply by 100 to get the percentage. The other two are net profit margin and operating profit margin. A typical profit margin falls between 5% and 10% but it varies widely by industry. They will tell you the same basic relationship of revenues to costs but expressed in different ways. Gross profit is revenues minus cost of goods sold, which gives a whole number.

One of the main jobs of a professional financial analyst is to analyze the P&L of a company in order to make recommendations about the financial strength of the company, attractiveness of investing in it, or acquiring the entire business. Analysts must go beyond the profit and loss statement to get a full picture of a company’s financial health. Its operating expenses consist of cost of sales, fulfillment, marketing, technology, G&A, and others.