As a small business owner, understanding the difference between net profit and gross profit is vital in making informed decisions. After all, these two figures can have a significant impact on your bottom line. Knowing how to calculate each accurately and what they mean in terms of profitability will help you make smart financial choices that keep your business afloat.
You need to know where both figures are standing in your business.
When it comes to tracking your business's performance, two numbers stand out above all others: net profit and gross profit. These figures tell you how much money was made or lost during any given period, such as a month or year. Read on to understand the differences between them before diving into their implications and how to calculate them.
It's easy to get confused by the difference and significance of gross and net profit, read on to see how to calculate them.
Gross profit is total revenue minus the cost of goods sold (COGS)
This figure represents how much money remains after subtracting the direct costs associated with producing products or services from total sales revenue generated within a specific period (usually monthly).
To calculate this number, simply subtract COGS from total sales revenues like so:
Gross Profit = Total Revenue – Cost Of Goods Sold (COGS).
Gross profit is your total revenue minus what you've sold.
Net profit is total revenue minus all expenses.
This figure represents how much money remains after deducting all costs associated with running a business from your total sales revenue.
To calculate this number, subtract expenses from your revenue: Net Profit = Total Revenue – All Expenses.
Net profit is your total income minus your expenses.
These two figures provide an invaluable look at the health and profitability of your small business.
Gross profit is how much you made after production costs were deducted, while net profit provides insight into the overall performance of your company by accounting for other operating expenses such as salaries, utilities, rent, taxes, etc. Both figures are important for understanding the financial viability of your business and serve as useful indicators when developing strategies for growth or expansion.
Working out these two figures can help you budget in the future.
Both are important in reflecting the incomings and outgoings of the business and overall profitability. It could be argued that net profit is more important than gross profit. This is because it represents how much cash you have available - and is this a more accurate reflection of how successful you are. While profit is not the sole indicator of success, it shows that the business is operating viably. And this is what lenders are most likely to ask for with a funding enquiry, as net profit reflects your affordability and gives them peace of mind that you will repay the funds.
However, gross profit is still important as it shows how much money in total exists in the business.
Gross profit and net profit are both important in different ways, but it could be argued that net is more important.
If you calculate your net profit and find that you are not making as much as you had thought or hoped, you could look at getting a business loan. This will help bridge a gap if you're experiencing a period of low cash flow or profits.
A business loan can give you the funds to expand your product range, take on new staff, move into better premises or location, be prepared for busy periods by stocking up on inventory, and much more.
A business loan from Love Finance can be used for any purpose within your business, so whatever your circumstances, you can use the funds to turn over more money and stay profitable.
Enquire with us here, and you can receive fast funding in as little as 4 hours.
In short, net profit and gross profit both tell you how successful your small business is in terms of profitability. Knowing how to accurately calculate each figure will give you a more sound understanding of where you stand financially so that you can make smarter decisions about the future of your company. By taking the time to understand these two metrics and their implications for small businesses owners, you'll be better prepared to ensure long-term success.
Both figures are important in different contexts and should be taken into consideration when making informed decisions about the future of your business.
