If you’re a fan of the television series Dragons’ Den you’ll be very familiar with the cringe inducing moment when the budding entrepreneur is asked for their business’ figures. “What’s your gross profit” Peter Jones will ask… the camera zooms in, their face goes blank overcome with panic and the Dragon sighs – know your figures you scream at the television set in desperation! But do you know your gross profit from your net profit, do you really know the difference?
You shouldn’t need to be pitching in front of a panel of millionaire investors to see the worth in getting to grips with these important financial terms, they equip you with valuable information to help you better understand the health of your business.
Read on for a clear and simple explanation…
Gross Profit
It can sometimes be referred to as gross income or sales profit.
Simply speaking: Gross Profit = sales – the cost of producing the goods sold.
Cost of producing goods may include:
Materials used
Direct labour
Packaging
Transportation
All these costs are variable and associated with the manufacture of the product or service you sell, gross profit is therefore helpful for understanding how efficiently your business manages the expenses directly associated with manufacturing or creating your product or service.
Net Profit
It can sometimes be referred to as the bottom line, net income, or net earnings. The net profit is the amount of money a company has left after all expenses have been subtracted from the total revenue over a period of time.
Simply speaking: Net Profit = sales – total costs.
Total costs include all variable costs associated with manufacturing a product or service that you used to calculate your gross profit, but also include all fixed costs such as:
Office expenses- telephone bill, stationery, utilities
Rent
Wages
Advertising
Insurance
It’s a crucial calculation when accessing the profitability of your business.
