The higher your Gross Profit Sales Productivity Ratio is the more money for the company to make a profit after paying direct operating expenses. This translates to more opportunities for your business and the people in your employ.
The lower the number, the more likely the business is operating at a loss, with less money available to pay other operating expenses at a profit to you.
Overview
Gross profit is the first level of profit from a Net Sale after the Cost of Goods used are deducted from the sale. The Gross Profit created is used to pay any remaining business expenses.
A falling Gross Profit Sales Productivity or Gross Margin Ratio shows that the cost of production is rising faster than the selling price, or that inventory is shrinking due to fraudulent activity or product spoilage. Higher ratios can typically be achieved in one of two ways:
- Reducing costs by paying for materials or labor at lower costs
- Marking up your product’s price
High Gross Profit Sales Productivity leads to more cash on hand and stability in times of economic downturn. A low ratio means cash is likely to be tight.
The formula for calculating Gross Profit Sales Productivity is as follows:
Output (Gross Profit) / Input (Net Sales)
A ratio of 0.42 means that the company is generating 42 cents in gross profit for every dollar collected and retained from sales. A 0.26 ratio means that $0.26 in gross profit is generated for every $1.00 sold and collected.
Higher Creates Opportunity: means more money for the company to make a profit after paying direct operating expenses.
Lower Creates Challenges: indicates that the company is probably operating at a loss, with less money available to pay other operating expenses.