You want to get your business in order, optimize processes, reduce costs and, of course, bill more. Because of this, it is very important that you know some accounting concepts in order to properly plan your company’s finances. One of them is the gross profit.
The importance of gross profit
Your company’s gross profit is important Financial health indicator Of your company. Therefore, knowing how to calculate this value is very important when planning your future. Any miscalculation can invalidate your strategies if they are based on numbers that do not match the reality of your business.
Gross profit is the value you get when you subtract your business’ variable costs from total income. That variable costs are the expenses that change depending on sales or production volume. As these increase, the former follow the same trend. If they fall, the cost comes with the fall.
An example? Let’s say you have a juice factory. Any expenses you have to make the juice are the variable costs. The more you make, the more fruit and sugar you use. The quantity of these products are the variable costs.
Thus, the gross profit calculation is:
Gross Profit = Total Income – Variable Costs
In summary, for trading companies, gross profit is equal to the value of sales minus the acquisition cost the goods sold. In industry, gross profit equals the value of sales minus the production costs of the products sold. This value is important for the calculation of the selling price.
Gross Profit vs. Net Profit
After gross profit is calculated, it is important to know how to calculate net profit as this will indicate if your business is giving benefit or harm.
In order to calculate this index, you need to know the fixed costs Of your company. Again in the juice factory example, the fixed costs are what you get with the sum of all Products that do not vary post-production.
That salary the staff who to rent of the building and some Steer They are the fixed costs of your business. With this data and the gross profit, you can determine the net profit of your company:
Net Profit = Gross Profit – Fixed Costs
If this value is positive, your company is fine. If it is negative, be careful, you will have to reconsider your business because it will harm you.