In this blog we are going to look at What gross profit means for your business. Your business journey map must have profit as a destination point, . If your destination is set for sales alone, then change your route or abandon your journey, it’ll end in tears otherwise.
When you set your numbers dial to profit, refine the calibration and mark it in terms of Gross and Net Profit.
In the world of numbers Gross does not mean unpleasant or disgusting – though making a rubbish gross profit is not good.
Making profit in your business is vital, in this blog we look at what gross profit means for your business. If you want a business, and not a hobby then your business plan must have profit as a destination point. Setting your destination for sales alone is a route to disaster. Change your route or abandon your journey, it’ll end in tears otherwise.
What gross profit means for your business
Firstly, let us take a closer look at what we are talking about. For example, Govan sells second-hand trainers online at £100 per pair. Now if he sells twenty of those, he makes £2,000 of sales. Congrats to Govan, but that’s not his profit. He needs to buy and clean those trainers before selling them. The costs are £40 a pair. This means that Govan makes £60 profit for each pair he sells, a total at £1,200. That £40 is his gross profit.
Your business may be in the hospitality business selling food. The difference between the cost of making a meal and selling it is gross profit. If your business sells training courses, the difference between course fees and venue hire and materials is gross profit. Where your business makes things, the product selling price minus the cost of making it is the gross profit.
For the record, gross profit is also called gross margin. The costs of buying trainers, food, room hire materials is cost of sales.
Check out our FREE online profit and pricing calculator.
Why your gross profit is a big deal
Firstly, your business gross profit is one of the most important financial barometers for the health of your business. Every time you sell something then your bucket of money builds up. Out of this bucket you need to pay for all your business expenses, including paying yourself. These costs are typically fixed expenses. Once you cover your fixed costs, you’re left with net profit.
When gross profit drops your break even point and margin of safety (safety cushion) gets worst. Check out our previous blog on break even to find out more and use our FREE online break even calculator.
Secondly, GP assesses how efficient your businesses is in using your staff team, materials and manufacturing set to make and sell what you do. Therefore, it is a metric that mostly is concerned with variable costs. These costs fluctuate in response to your business activities. materials, wages, sales commissions, credit card fees and shipping.
Making Decisions in your Business
Thirdly, knowing and understanding your gross profit helps you make fantastic business decisions. What sort of decisions I hear you say? Well, pricing decisions, there is loads more business insight and application we can do once we get our heads around gross and net profit. Pricing strategies, decisions on outsourcing, dropping products, looking evaluating business opportunities, sacking clients, are just a few examples of the application of gross and net profit.
For example, you want to expand your market share. Knowing what you can play around with, discounting and bundle packages is easier when you know what your gross profit is.
Profit margin and pricing
Most of us want to sell more, make more profit, who wouldn’t? Knowing what your costs, mark ups and margins are, and need to be is one way.
This FREE profit calculator shows you what gross profit you are making now. What gross profit you could make if you altered selling price and costs.
Type in your numbers to our calculator. See what the numbers shows for your business.
Good gross profit gives you much healthier cash flows. Gross profit has a direct relationship with selling prices. The higher the margin the better your business has been making revenue.
Measuring and managing your gross profit.
Measuring is about having fit for purpose accounting systems. The cloud and digital accounting is a must have, not a ‘it would be nice to have’. Want to find out more then check out our FREE guide, Release the Power in you.
Let our FREE online profit calculator work it out!
Measuring is half the battle, managing is the other half. For example, Govan wants to make more profit from selling trainers. There’s a number of he can do. He can charge more than £100 per pair of trainers. Govan can also spend less on buying the trainers.
It is easier, (not easy) to control and manage cost of sales, such as training shoes, food, materials. It is less easy to control support costs like Insurance, salaries and wages, and business rent.
Ultimately, a good gross profit margin might well rely on the industry but that said, you want your gross profit percentage to be one that allows you to both cover your costs and give you a competitive and healthy return for your business.
If you want your business to carry on, sustain, survive then learn to keep an eye on your gross profit. If you don’t do this then you are missing a trick, and your business can suffer and lose money.
Get in touch with us to see how we can help you increase your profitability and all your accounting and tax needs. For more business and finance , news, advice and tips, don’t forget to watch our weekly broadcasts, listen to our weekly podcast I Hate Numbers.