What is the difference between gross profit margin and gross profit markup?
Gross Profit Margin and markup measure the profitability of a business and your project, BUT:
- Gross profit MARGIN is the percentage of the gross profit/sale.
- Markup is the percentage of direct costs.
- Gross profit margin will always be lower than markup because, for example, 30% on cost will always be less than 30% on sale, as the cost cannot be higher than the sale price.
- Gross profit margin allows you to calculate breakeven.
Live example:
Your direct costs on a project are £50 000. Adding a markup of 30% will give you a sale price of £65 000. Now, your profit is £15 000.
If you divide this gross profit by the sale value of £65 000, you will come up with a gross profit margin of 23%.
If you want a gross profit margin to be 30%, the sale will need to be £71 429.
Why is this important for breakeven?
The breakeven is the minimum sale value needed to cover the company’s overheads, which include:
- Office costs, rent, admin salaries, interest, bank fees, insurance, etc.
To cover £12 000 company overheads/month with a 30% gross profit margin, you need to achieve a minimum monthly sale of £40 000. Only gross profit margin can help you to calculate this figure in a simple way.
Do you know your company’s breakeven point? How do you decide on taking on a new project?
Try our new free tool that can help you calculate the project’s profitability here: www.profit-calc.co.uk
