What are these key performance indicators, how do they differ, and how do we calculate them? 

Let's start off with Gross Profit Margin. 

Gross Profit Margin measures how efficiently your business produces or delivers its services, after accounting for the cost of goods sold (COGS) or direct costs. For a dance studio this would include costs like: instructor salaries, classes, studio rent, and materials (Materials may be called studio supplies as well) 

Formula: Gross Profit subtracted by COGS divided by total revenue x 100.

Example: Let’s say your studio's total revenue is 150,000, direct costs are 50,000, and gross profit margin is 100,000. You would divide 100,000 by 150,000 and multiply that number by 100. This would give you 66.67%. (100,000 ➗ 150,000 ✖️100 = 66.67) That would mean that 66.67% of your total revenue has been retained after covering direct costs. 

Next comes Net Profit Margin. 

Net Profit Margin is a broader measure that reflects your businesses probability after all expenses have been deducted, not just direct costs. This includes overhead, utilities, marketing, taxes, and any other expenses. 

Formula: Net Profit divided by total revenue multiplied by 100.

Example: Let's say your total revenue is 150,000, and total expenses (direct and indirect) are 120,000. Your Net Profit would be 150,000 - 120,000 = 30,000. Then that 30,000 gets plugged into the formula. (30,000 ➗  by 150,000 ✖️ by 100 = 20%.) This would mean 20% of your revenue is profit. 

Both margins are important! Gross Profit Margin tells you how efficiently you’re providing services, while Net Profit Margins shows how well you’re managing all aspects of the business including overhead and indirect costs. 

Don’t take any chances this year come tax time. Make keeping good books a priority!