Understanding Gross and Net Profit
Profitability ratios are a simple way to measure how well your trade business is using its resources to generate profit. By focusing on two key ratios—Gross Profit Margin and Net Profit Margin—you can better understand your financial performance and identify areas to improve.
What is the Gross Profit Margin Ratio?
The Gross Profit Margin shows how much profit you’re making after covering the direct costs of your jobs (materials and subcontractors). It’s expressed as a percentage of your sales.
Here’s how you calculate it:
Gross Profit Margin (%) = (Gross Profit ÷ Sales) × 100
Example:
Let’s say your sales for the month are $50,000, and your costs of goods sold (COGS) are $30,000. Your gross profit is:
$50,000 - $30,000 = $20,000
To find the gross profit margin:
($20,000 ÷ $50,000) × 100 = 40%
This means 40% of your sales are left after covering direct costs. If your gross profit margin is decreasing over time, it might mean:
Your pricing is too low.
Your materials or subcontractor costs are too high.
What is the Net Profit Margin Ratio?
The Net Profit Margin measures how much profit you’re keeping after covering all expenses—not just direct costs but also rent, admin, and other operating costs. It’s also expressed as a percentage of your sales.
Here’s how you calculate it:
Net Profit Margin (%) = (Net Profit ÷ Sales) × 100
Example:
If your sales are $50,000, and your net profit (after all expenses) is $5,000:
($5,000 ÷ $50,000) × 100 = 10%
This means you’re keeping 10 cents of every dollar you earn. To discuss a healthy gross profit for a trade business get in touch with us or with your accountant.
Why These Ratios Matter
Understanding these ratios helps you see if your business is on track:
A high gross profit margin means you’re doing well at managing direct costs, but it doesn’t tell the whole story.
A high net profit margin shows you’re not only controlling job costs but also managing your overall expenses efficiently.
If your net profit margin is low, it’s time to look at your expenses and see where you can cut back.
Drawings and Your Profit
It’s important to remember that drawings (money you take out of the business for personal use) don’t show up in your P&L as an expense. This means your net profit figure doesn’t account for what you’re withdrawing. Make sure to keep track of your drawings separately so you have a full picture of your finances.
How We Can Help
At Admin for Tradies, we can:
Help you calculate and track your gross and net profit margins.
Provide easy-to-read reports so you can see trends over time.
Work with you to manage costs, set realistic prices, and improve profitability.
Understanding these ratios is a simple but powerful way to take control of your trade business. Let us help you get started. Contact Monique for a free no obligation chat.