Profit and Loss Report (P&L)

Gross Profit Margin

What Does It Mean?

Here, your Profit / Loss is made up of two parts: Gross Profit and Gross Profit Margin. Gross Profit is the amount of money you have left over after you’ve tallied up the cost of goods sold (COGS), or the service that’s been provided, while your Gross Profit Margin is the amount left presented as a percentage of your gross income.

Why Does It Matter?

The bottom line is, well – this is your bottom line! These are the numbers that ultimately matter the most: the ones that tell you how viable your business is going forward. After all, it doesn’t matter how much money you earn from sales if it costs you more to create the thing you sell. Profit is sanity, revenue’s vanity, as the old adage goes.

Profit & Loss - Financial Dashboard

How Do You Measure the KPI?

This is a pretty straightforward calculation. You need to figure out the total revenues you retain once you’ve accounted for all the direct costs that come with producing or delivering your company’s offering. So: add up your direct costs and subtract them from your total revenue to get your gross profit. Then, calculate what percentage of your revenue is left after paying those expenses. That’s your gross profit margin. The metrics that will feed into your gross profit / gross profit margin calculations are:

Income

Income - Profit and loss Report
Click to enlarge

This refers to the total revenues coming into the business during a particular time frame. You may also want to break it down by product or department to get a sense of where sales are strongest.

Expenses

Expenses - Profit and loss Report
Click to enlarge

Again, this adds up your total direct costs during the same time periods, and can be broken down by department to figure out which areas of the business are most cash-hungry.

What Data Sources Would You Use to Measure the KPI?

These calculations draw from your total sales figures, which will most likely come from SalesForce or equivalent, and your direct cost figures, which you probably monitor through your accounting software, or TMS / ERP.

Give Me an Example…

Imagine your company is going through a rough patch and budgets are squeezed. By comparing different areas of the business to see which have the smallest gross profit margins – or possibly even make a loss – you’re far better equipped to tackle the problem at the root. You might do this either by intervening to improve performance in problem areas, or possibly phasing out the loss-making areas of the business altogether.

What Benchmark / Indicators Should I Use?

  • Increase to gross profits, year on year, to show that overall revenue is going up or costs are going down.
  • Increase to your gross profit margin, i.e. you keep more of each dollar you earn.