Are you selling a lot of product, but can’t seem to make a consistent profit? Are you having a hard time covering your overhead costs each month? The problem may very well be that your gross margin’s are simply too low.
What is Gross Profit?
The first question is what exactly is gross profit. It is pretty simple, Gross Profit = Sales – Cost of Goods Sold.
Gross Profit Margin = Gross Profit/Sales
So what is a reasonable gross profit margin?
At ProjectionHub we help business owners create financial projections without the need to have a PhD in Excel. We have had thousands of business owners use our web application to create financial projections, so based on their projection data, we can share what the average business reports for their gross profit margin.
Average Gross Profit for a Product Business – 65%
Average Gross Profit for a Service Business – 72%
Our hope is that this gives you a frame of reference. If you are trying to run a business with 25% gross profit margin, and you are struggling, now you know why. It is just difficult to make the math work to run a profitable business when your gross margin is significantly lower than the average.
How to improve gross profit?
If you want to improve your gross profit margin, you really only have 2 choices.
- Raise your prices
- Lower your cost of goods sold
If you can’t raise prices, and you can’t lower costs, you need to consider whether this business can really work, or not. Create a set of financial projections with our tool, and determine what volume of sales you would need in order to break even.