Gross Profit Vs Net Profit
If you are a business owner, then knowing what your gross and net profits are will be vital to your business. Whilst net profit shows how much money you made overall, knowing what your gross profits are in relations to them can help you form a better business strategy.
In a nutshell, gross profits are your turnover, minus the costs of the goods sold. This includes products, materials, shipping costs etc.
Your net profit is your gross profit minus all the other costs associated with running your business, such as salaries, rent, taxes, insurance, utilities etc.
Knowing what your net profit is at any given time will give you an indication of how much money your company has to reinvest in the business or distribute to shareholders… or alternatively how much you need to pull your socks up!
How to use net and gross to help your business succeed
The net profit alone doesn’t necessarily show the truth of how well your company is doing, and that’s where knowing what your gross profits are coming in handy. You may, for instance, have moved to larger premises or have had a recruitment drive for staff to handle an anticipated rise in work, in which case your net profits will have taken a hit. However, if your gross profits are good, you can attribute the downturn in net profits to the expenses incurred in the move and be confident that you’re still on the right track in business terms. Alternatively, high gross profits and low net profits will tell you that even though your core business is strong, you need to investigate where you’re spending the excess money enabling you to do something about it.
We find that, as a general rule of thumb, if you are looking after your overheads properly, the net profit should take care of itself. There’s a great phrase, “turnover is vanity, profit is sanity but cash is reality”, which means you need to get your profit right before taking care of your working capital.
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