Overview
This paper will use several external sources to assist in the explanation of terms and calculations. The links to these websites will be provided when necessary. It is important to consult with your certified accountant on a regular basis.
Setup Process
The management system gives the ability to set GPM% for products through the product catalog, Labor margins through the labor catalog and of course, ability to set GPM% at the job level. When determining selling prices on products, labor or jobs, one must consider Gross Profit Margin (GPM) calculations the system uses versus the “Mark Up” calculation option that some companies may have been using prior to this management system.
Process Procedures
There is a difference between Gross Profit Margin and Mark Up. The differences are described below from www.accountingcoach.com:
“Gross margin or gross profit is defined as sales minus cost of goods sold. If a retailer sells a product for $10 which had a cost of $8, the gross profit or gross margin is $2. The gross profit ratio or the gross margin ratio expresses the gross profit or gross margin amount as a percentage of sales. In our example the gross margin ratio is 20% ($2 divided by $10).
Markup is used several ways. Some retailers use markup to mean the difference between a product's cost and its selling price. In our example, the product had a cost of $8 and it had a markup of $2 resulting in a selling price of $10. The $2 markup is the same as the $2 gross profit. However, the markup percentage is often expressed as a percentage of cost. In our example the $2 markup is divided by the cost of $8 resulting in a markup of 25%. (Some retailers may use the term markup to mean the increase in the original selling. For example, if the $10 selling price was increased to $11 because of high demand and limited supply, they would say the markup was $1.)” Link: http://www.accountingcoach.com/blog/gross-margin-markup
Pacific Solutions’ management systems (JobRunner and FloorManager) utilizes Gross Profit Margin Ration in its profitability calculations. We term this Gross Profit Percentage or GPM.
The formula for calculating Gross Profit Percentage (GPM) is as follows:
Total Sales – Cost of Goods Sold
Gross Profit Percentage (GPM) = __________________________________________
Total Sales
Once the decimal version of the GPM is calculated, it is multiplied by 100 to get the % version of the decimal percentage.
End Result Summary
When viewing a job’s profitability, the system will be displaying a GPM% that reflects the Gross Profit Ration formula. There are times when jobs will be positive margins and times when jobs will be negative margins.
For example, this job shows details of profit on a positive job:
The formula for the Total Job GPM is Total Sales – Cost of Goods Sold / Total Sales:
28,165.47 – 13,905.00 = 14,260.47 14,260.47/28,165.47 = .506310 .506310 x 100 = 50.63% GPM
This job displays a positive GPM percentage.
Another example, this job shows details of profit on a negative job:
The formula for the Total Job GPM is the same: Total Sales – Cost of Goods Sold / Total Sales. However, because the Total Sales is a negative number, the subtraction rules change due to the rules of algebra:
-55,718.40 – 56,286.73 = -112,005.13 (a negative number subtracting a positive number follows the algebra rule of “same sign add and keep that sign”). Link: https://www.wyzant.com/resources/lessons/math/elementary_math/positive_and_negative_numbers/subtracting_positive_and_negative_numbers
-112,005.13/-55,718.40 = 2.01020 2.01020 x 100 = 201.02% GPM
A last example, this job shows details of profit on a job with a loss:
The formula for the Total Job GPM is the same: Total Sales – Cost of Goods Sold / Total Sales. What makes this job a negative GPM% is the selling of materials for less than the total cost of goods:
1,000.00 – 1,620.00 = -620.00 -620.00/1,000.00 = -.62000 -.6200 x 100 = -62.00%
Financial Implications
Tax Types such as “Material Only”, “Use Tax”, “HST”, “GST” and some “PST” taxes are considered pass-through revenues. Therefore, the total used for Total Sales on a job is the total of material and labor before tax.
Just because a job is a negative contract total, does not necessarily mean the GPM% will be negative.
Troubleshooting/FAQs
Should a margin on a job appear incorrect, take the job’s financial information and plug it into the GPM formula above to check the math.