This is the third article on “profitability”—a guide to help understand and develop the true significance of its impact on a business: revenue growth, peace of mind, and freedom to do about whatever you want to do.
A few weeks ago on Shark Tank, a contestant was asked what their gross profit was and they provided their net profit number (on national TV). Knowing the distinction between gross and net can be helpful and save some embarrassment.
What is the distinction? Gross profit is the profit made on sales after deducting all the costs associated with creating the service or manufacturing the product. It isn’t all costs in the business, but only those associated with creating the product or service. So the common costs known as overhead, or general and administration like rent, insurance, clerical, or sales salaries, won’t be included in the costs associated with creating the product.
Net profit is different from gross profit because net profit is the difference between the revenue and all of the expenses, including the cost associated with creating the product (cost of goods) as well as the sales, clerical, owners, and all other costs running the business.
How can knowing the difference can help you make more money? Take the gross profit dollars and divide that by revenue to create the gross profit margin percentage. Looking at that each month will tell you quickly if the cost of goods is running smoothly. If there are wide variations, then that indicates there are things to investigate, such as labor, material, or the other costs associated with creating the product or service. Good companies with good accounting systems and management will see a pretty consistent gross profit margin percentage.
Review your gross profit margin percentage consistently for higher profit – both net and gross.
The Business Growth Coach