The Gross Profit Margin ratio is a very important profitabilty ratio used widely in all industries and businesses and it is very important to a small business owners like Frank & Peter because it gives them a very clear idea of what kind of cushion a small business has after it has paid for its cost of goods sold. This cushion is what determines the profitablity of a business and the next item that is subtracted from the Gross Profit to get to the operating income is of course the operating expenses. Thus having a good Gross Profit Margin ratio is critical to all small businesses like Green Lawn Landscaping.

The Gross Profit Margin ratio is a very important profitability ratio used widely in all industries and businesses and it is very important to a small business owners like Frank and Peter because it gives them a very clear idea of what kind of cushion a small business has after it has paid for its cost of goods sold. This cushion is what determines the profitability of a company and the next item that is subtracted from the Gross Profit to get to the operating income is of course the operating expenses. Thus having a good Gross Profit Margin ratio is critical to all small businesses.

Since Green Lawn Landscaping is a service business that does not have any cost of goods sold, the gross profit number is the same as the sales number for the firm. Thus in this case the gross margin is 100% for all the three years of 2016, 2017 and 2018 given that there is no cost of goods sold. It is important to understand however that if the firm were to partner with another contractor on a particular job, and had to pay out a certain percentage of the income to the other sub-contractor, they would see a cost of goods sold. For example if Green Lawn Landscaping were to work on a large contract for landscaping an office complex working with ABC Landscaping and the total sales from these transactions resulted in an income of $100,000 with the proceeds being split evenly between both firms. the cost of goods sold for Green Lawn Landscaping would be $50,000 since it would be paying that amount to ABC Landscaping. Thus in this instance the gross profit margin for Green Lawn Landscaping would be 50%.

In order to be realistic however, instead of using the gross profit for this calculation, we have simply entered in the Profit before Interest & Taxes to calculate the Gross Profit margin. This analysis will of course produce the same result as the operating profit margin ratio covered in the previous section.

Quick Links:

1. Go to the Corresponding Template section for this industry.
2. Go to the Corresponding Questionnaire section for this industry.