Differences Between Gross and Net Profit (and Why Neither Matter Unless You Get Paid!) https://qagroup.com.au/wp-content/uploads/2019/05/ivan-bandura-739702-unsplash.jpg 1000 668 emily https://secure.gravatar.com/avatar/7674429a1128ea5857c2339e41b7c7b4?s=96&d=mm&r=g
Wondering if you’re doing everything you can to boost revenue and cut costs? Or if your business is actually more profitable this year than it was last? The best way to answer these questions is with a thorough assessment of profitability. That’s where gross and net profit calculations come in. These are two of the most important metrics for measuring your capacity to generate earnings relative to costs and expenses. Let’s take a look at the differences between gross and net profit, and what they can reveal about the financial health of your business. Gross profit: a general overview of profitability You can calculate your company’s gross profit by subtracting the cost of the goods or services you sell from your total revenue, over a specific period of time. The equation looks like this: Sales – cost of goods sold = gross profit When determining the cost of goods sold (otherwise known as COGS), businesses take into account all of the processes involved in their production and delivery to customers, including:
- raw materials
- shipping and fuel.
- knowing how much you can safely pay yourself each month, or divide among your business partners;
- applying for a business loan, where net profit is an important part of the lender’s free cash flow analysis
- measuring performance against the industry benchmark and your main competitors.
- require payment up front, and only offer 30 day terms to clients who have proven their trustworthiness
- track invoices weekly, contact clients immediately after the payment deadline has been missed, and work together to set a new deadline
- suggest an installment program for clients who are encountering financial difficulties.