Gross Profit is an indispensable metric in any business activity statement. When you control this indicator, you will understand the entire business situation. However, there are still many people who do not really pay attention to it, leading to inefficient business. So let’s find out immediately what is gross profit? Why is it necessary to control this indicator? And the most accurate way to calculate gross profit to optimize business processes.
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What is gross profit
Gross profit, or often called simply gross profit, with the English name is Gross Profit. To understand in the simplest way what is Gross Profit, it is the difference from the amount of money that the business earns after subtracting the costs of selling (from the cost of creating products, services, other expenses). arising from the time the product is manufactured until the finished product is delivered to the consumer).
Formula for calculating gross profit
Gross profit = net sales – cost of goods sold
Net sales = Sales – sales deductions
Definition of indicators
Cost of goods sold is the total cost that an enterprise spends to create a product, from the cost of purchasing raw materials, production costs, warehouse costs, marketing expenses, and administrative expenses. ,..
Net revenue is the total revenue a business generates, from selling products to providing services.
Sales deductions will include taxes such as export tax, value added tax, excise tax and discounts, rebates, and returns.
With such a formula for calculating gross profit, you will easily control how much profit margin, one dollar spent, how much revenue and profit is earned. From here you can orient development, allocate capital in the most reasonable way.
Gross Profit Margin
Gross profit margin (%) = Gross profit / sales
The larger the profit margin, the higher the net profit of the business. As a result, the business is operating more and more efficiently. Every chi is more tightly controlled.
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Note: It is necessary to clearly distinguish, to avoid confusion between the two concepts above. The gross profit will be in the currency (dong, dollar, …) and the gross profit will have the unit of percentage (%). It is necessary to distinguish these concepts so that when comparing and analyzing businesses and stores with each other, you will get a more accurate view of each business.
A mistake when comparing companies with each other, it is often considered that the party with the higher gross profit is the more successful business. Such a comparison is downright lame. There are many other factors affecting this index, the scale of operations and different business fields. Therefore, when putting businesses on the scale, it is necessary to be very careful if you do not want to make serious mistakes.
Why should gross profit be calculated
?To better understand what Gross Profit is, it acts as a very important indicator of a business. It is used to evaluate whether the business or store is operating effectively or not. However, not everyone knows how to calculate gross profit correctly. Especially for self-employed and sales people, very few people know how to measure work efficiency by calculating gross profit. This makes them easy to fall into a situation where they think they are profitable but are suffering heavy losses and one day realize it, it is too late. They had to sadly give up their passion. In order not to fall into this situation, learn carefully about gross profit and how to calculate this index.
What’s the benefit of calculating Gross Profit
?When you have accurate Gross Profit metrics in hand, you can check the efficiency of your workflow. Control what costs are reasonable, what costs need to be cut to reap more profits.
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If you are looking to scale your business then this is the first indicator investors look at. From these numbers they will know if you are really effective in sales management or not. If you control this index, the percentage of investors pouring capital into your business will be much higher.
Above is the calculation formula and what you need to know about gross profit. Anyone who wants to have a successful business should look at reality, not based on feelings. Gross profit will be the most accurate measure to help you determine the situation and come up with the most suitable business plans. Good luck!