Gross Margin Percentage Ratio and QuickBooks 2014 - dummies

# Gross Margin Percentage Ratio and QuickBooks 2014

You can track your company’s gross margin percentage ratio in QuickBooks. Also known as the gross profit margin ratio, the gross margin percentage shows how much a firm has left over after paying its cost of goods sold. The gross margin is what pays the operating expenses; financing expenses (interest); and, of course, the profits.

The gross margin percentage ratio uses the following formula:

gross margin/sales

For example, using the data shown, you can calculate gross margin percentage as follows:

\$120,000/\$150,000

 Sales revenue \$150,000 Less: Cost of goods sold 30,000 Gross margin \$120,000 Rent 5,000 Wages 50,000 Supplies 5,000 Total operating expenses 60,000 Operating income 60,000 Interest expense (10,000) Net income \$50,000

This formula returns the value of 0.8, meaning that gross margin equals 80 percent of the firm’s sales.

No guideline exists for what a gross margin percentage should be. Some firms enjoy very high gross margins. Other firms make good money even though the gross margin percentages are very low. In general, of course, the higher the gross margin percentage, the better.

Small businesses should enjoy high gross margin percentages. It’s common to assume that a small business can get away with a lower gross margin percentage than some large competitors can. However, that isn’t really true. Gross margin percentages should be higher for small businesses because small businesses often can’t get the economies of scale that large businesses can get.

A low gross margin percentage may work just fine for Walmart, for example. However, it’s tough for a small retailer to work with such a small gross margin percentage.