Profit – the nuts and bolts
When you look at your accounts, can you read your profitability? It helps to understand these key concepts that can drive success in your business.
On your Profit and Loss Statement, gross profit is the difference between revenue and the cost of goods sold (or services provided). It generally appears before administrative expenses and general overheads are accounted for. Ideally, gross profit covers your overheads as well as generating your targeted profit, your net profit.
Gross Profit = Net Sales – Cost of Goods Sold
Net profit is your actual profit after all expenses and overheads have been paid. It is your bottom line, crucial when you are assessing your business’ actual profitability.
Net Profit = Total Revenue – Total Expenses
Gross profit percentage is another valuable metric. It is a percentage of sales. It is the ratio of your gross profit in proportion to your sales:
Gross profit % = (Gross Profit ÷ Sales) x (100 ÷ 1)
This is an indicator of production efficiency and financial health. Ideally, it is fairly stable, barring drastic upheavals in your business or industry. A drop might indicate factors needing attention, such as a rise in costs, waste, or bad debts.
Changes might also mean increased competition or increasing demand for discounted products or services. It could be a response to changes in the business, such as expansion driving increased production costs or a higher wages bill.
These key metrics are windows onto profitability. Understanding them helps you set goals and drive growth. Talk to us about how these metrics look for your business.