How to Calculate and Improve Gross Profit and Gross Profit Margin

Opening or managing a small business requires ambition, people skills, a love of multitasking, and a willingness to dive deep into financial statements, calculations, and metrics. 

You can’t grow your business without knowing how it’s performing every day. That’s why it’s so critical to understand your gross profit and gross profit margin. It’s one of the most important business metrics to track and manage, and it’s a big part of any business’s income statement. 

Read on to learn more about gross profit, how to calculate it, and different ways you can improve your restaurant’s margins. 

What is gross profit? 

Gross profit shows how much money is coming in, minus how much money you spent on the materials you sold — known as the cost of goods sold, or COGS. 

Gross profit vs. net profit 

Gross profit, also known as gross income, is how much money is left over from your revenue after subtracting your COGS.

Net profit, also known as net income, is the amount of money left over from your revenue after subtracting COGS plus additional operating expenses, including:

• Labor costs 

• Overhead costs including rent and utilities

• Production costs

• Taxes

• Administrative fees

Net profit is the bottom line. It’s how much can end up in the owner’s pocket at the end of a particular time period — or, if your small business does profit sharing, it’s the amount of profit that’s split among owners and employees as a bonus. 

Net profit margin is the same information but expressed as a percentage of revenue.

How to calculate gross profit 

Gross profit is always calculated over a specific time period. Gross profits for an entire operation can be calculated as follows:

Total Sales in a specific time period - COGS in a specific time period = Gross Profit

For example: 

$18,000 in sales in a month - $6000 in cost of goods sold in the same month = $12,000 gross profit

Gross profit can also be calculated for specific items over a particular time period. That formula is as follows, with an example from a restaurant trying to determine how much money they made on cheeseburgers in one week: 

Total sales of cheeseburgers in a week - cost of goods sold of the amount of cheeseburgers sold = gross profit on cheeseburgers

$200 cheeseburgers sold - $60 cheeseburgers COGS = $140 gross profit on cheeseburgers

Cost of goods sold (COGS)

Calculating cost of goods sold is a necessary aspect of determining gross profit and gross profit margin. COGS includes the raw materials or inventory used to create the sold item. 

How to calculate the cost of goods sold 

Here’s the formula for COGS:

(Beginning Inventory + Purchased Inventory) - Final Inventory = Cost of Goods Sold

And here’s an example from a small convenience store’s COGS over a week:

($2000 on beginning inventory + $220 additional purchased inventory) - $500 final inventory = $1720 COGS

Gross profit margin 

Gross profit margin shows how profitable each item is, or how profitable the business is as a whole, expressed as a percentage of revenue. It answers the question “what percentage of our revenue is left over after we deduct the cost of goods sold?”

How to calculate gross profit margin 

Here’s the gross profit margin formula: 

Gross profit / Revenue x 100 = Gross profit margin

It can also be broken down as follows: 

(Revenue – Cost of goods sold) / Revenue x 100 = Gross profit margin

And here’s an example from a hardware store:

($12,000 in revenue - $5,000 cost of goods sold) / $12,000 in revenue x 100 = 58.3% gross profit margin

How to positively impact your gross profit 

Boosting gross profit is a worthy business goal. It helps increase the baseline amount you have to work with when going to pay all your other operational expenses, like rent, payroll, equipment services, utilities, and more.

There are three main approaches you can take to increase gross profit: decrease costs, increase sales volume, and increase prices. We’ll walk you through a few ways to approach each path.

Decrease costs 

It may feel like a tall order these days, but decreasing your variable and fixed costs is a helpful way to increase your business’s overall profit margin. Despite inflation, it’s always still possible to reduce your costs. Here’s a few approaches to try:

Reducing fixed costs

1. Renegotiate your lease when it’s time to renew it.

2. Shop around for a cheaper internet provider. 

3. Shop around for a cheaper insurance provider. 

4. Refinance debt to get a lower interest rate and to reduce your payments during a slow period — but do talk to your accountant before making this move, as it comes with its own risks.

Reducing variable costs

1. Negotiate with vendors to get better prices.

2. Shop around for new, cheaper vendors.

3. If you notice that some products aren’t selling and tend to go stale on the shelves, stop selling them altogether and reduce waste and inventory costs.

4. Streamline your offerings and cut out products with particularly high COGS, especially if they’re not popular. 

5. Analyze labor cost and ensure you’re not over-scheduling your staff on slow days. 

Increase sales 

Growing your sales, and thus increasing overall cash flow, is another very useful approach to increasing profit margin, and you can do so with smart investments into marketing. You can test out any of the following marketing channels, and most of them are either free or very affordable. Track what works and what doesn't, and when you find out what’s helping you increase your sales, keep doing more of that. You’ll find your gross profit margin growing when you do. 

Social media marketing

If your restaurant doesn’t already have a social media presence, make an account on Instagram, Facebook, and TikTok. Enlist the help of a trusted Millennial or Gen Z staff member (and pay them for this additional work), and start putting together some posts, photos, and videos to share. You will slowly grow your following and be able to provide potential customers who look you up a glimpse of what you do at your business — and why they should pay you a visit.

Some examples of popular types of social posts include:

• Staff spotlights

• Product demos

• Behind-the-scenes photos and videos about your business operations

• Sale and promotion posts

• Story posts (where you talk about the origin of your business)

Also, be sure that your Google business listing has all the correct information, including your hours of operation, website, phone number, and social media links. Google is now where many of your customers will get their first impression of your business, so make sure you’re setting the right expectations.

Paid ads

Social media paid ads cost anywhere from a few cents to several dollars, but it’s still a very low-cost way to promote your best social media posts. It works best for limited time offers — for example, if you’re doing an end-of-season blowout sale, boosting your social media post about the sale will put that post in front of many potential customers in your target audience who don’t necessarily follow your page yet.

Community events and sponsorships

Try sponsoring a local soccer team, hosting an event for local artists or musicians, or participate in a community fair. You’ll meet a ton of new potential customers and introduce them to your small business. 

Increase prices

As restaurants continue navigating food inflation, it’s quite normal to raise the selling price of menu items and services. Increased It’s understandable to increase total sales revenue to cover your hefty material costs and reach profitability. 

Even an increase of 5% across all your item prices can help boost your profit margin. You can also approach your price increases more tactically: find your most popular items and increase their price, or only increase the price of items whose COGS has markedly increased in the past year. A mix of these tactics can work, too. 

If you’re doing more significant price increases, be sure to give your customers the heads up. Post a sign explaining how your costs have gone up because of factors outside of your control. Let guests know that you want to be able to continue doing business in your community for years to come.

Grow your gross profit margin and give your restaurant more wiggle room

By taking any of the above steps to increase your gross profits, you increase the amount of money you have available to cover the cost of doing business — and even make investments that will help your business grow.