Gross profit margin is a metric you can use to measure your business’ profitability by comparing the revenue you generate (net sales) and the costs directly related to the products you sell (costs of goods sold). These costs do not include any operating costs, taxes, and other expenses. Here’s how you calculate gross profit margin:

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Gross Profit Margin = (Net Sales - Costs of Goods Sold) / Net Sales * 100

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With gross profit margin, you can find out whether the revenue your business earns is fully covering your production costs.

A high gross profit margin tells you that your business is successfully earning more than enough profit to cover production costs. A low gross profit margin, on the other hand, tells you that your business is only slightly generating enough profit to cover production costs.

Net profit margin is a metric you can use to measure your business’ profitability by comparing your net income with revenue. Net income is the revenue you have left over after costs of goods sold, operating costs, and other expenses like taxes, debts, and related payments. Net income can also take into account other sources of income you generate outside of your business. Here’s how you calculate net profit margin:

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Net Profit Margin = (Revenue - Costs of Goods Sold - Operating Costs - Taxes - Other Expenses) / Revenue * 100
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With net profit margin, you can find out how much of each revenue your business makes turns into profit after accounting for associated costs and expenses.

A high net profit margin tells you that your business is turning a considerable amount of revenue into profit compared to the costs your business is incurring.

Your profit margin might increase due to one of the following factors:

• Your net sales have increased while the costs of selling those goods has remained stable
• Your costs of selling goods have decreased while your net sales have remained stable
• Your operating expenses have decreased while your net sales have remained stable

Your profit margin might decrease due to one of the following factors:

• Your net sales have decreased while the costs of selling those goods has remained stable
• Your costs of selling goods have increased while your net sales have remained stable
• Your operating expenses have increased while your net sales have remained stable

You can increase your profit margin in a few different ways. First, you could increase your total net sales to increase revenue while keeping your costs of selling those goods and operating expenses stable. If you’re unable to increase your total net sales, see if you’re able to increase the price of your goods to increase total revenue. You can find ways to decrease your selling costs and operating expenses.

Gross profit margin shows the percentage of revenue your business makes that exceeds the costs associated with producing the goods you sell. 

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Net profit margin, on the other hand, shows the percentage of revenue your business makes that becomes net profit compared to total operating costs and related expenses.

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You can find both gross profit margin and net profit margin data in the profit and loss (P&L) statement that you can generate for free when you sign up for Wave. By analyzing your income, cost, and operating expense data, Wave will automatically generate a profit and loss statement that clearly displays both your gross profit and net profit.