So you'll have a figure for sales, in this case £90,000. You'll now have a figure for cost of sales - let's say £40,000 in this case - which wouldn't be far off the mark for a cafe. So you're forecasting that £90,000 will come through the till, and £40,000 will go straight to suppliers - leaving you with £50,000 to play with. This £50,000 is called your gross profit.
So you'll make £50,000 if you sell £90,000 - how about if you sold £120,000 worth of food and drink? This is where a calculation called the Gross Profit Margin comes in handy.
To calculate your gross profit margin, take your Gross Profit (£50,000) and divide by your total sales (£90,000), then multiply it by 100 to get a percentage:
£50,000/£90,000 x 100 = 55% - your Gross Profit Margin
So that means that for every £100 of sales, you should make £55 of gross profit. So if you brought in £120,000, you could expect to make:
£120,000 x 55% = £66,000 - in gross profit.Real life isn't quite that simple, but your GPM will give you a good guide as to how profitable your business could be.
The GPM is important because of it's one of the three main variables that you can control in order to make your business profitable - you can increase sales, increase GPM, or reduce your overheads - which we'll look at in the next blog.