2016-06-09 00:00:00 Uncategorized English https://d3hrajprm8dqcv.cloudfront.net/wp-content/uploads/2017/05/08194842/Finance-Gross-Profit-How-to-Calculate.png How to Calculate Your Gross Profit

How to Calculate Your Gross Profit

2 min read

For a startup, it is important to calculate Gross Profit and gauge the performance and the direction in which the business is heading. This helps in determining the current profitability of a business based on two attributes, namely: Net Sales and Cost of Goods Sold. What is Gross Profit? Gross Profit is the total revenue amount that a company earns before deducting the expenses connected with that revenue. To calculate Gross Profit, you should know the total amount of Net Sales and the total amount of Cost of Goods Sold. The formula of Gross Profit is Gross Profit = Net Sales – Cost of Goods Sold. If the Net Sales is not calculated, then you can formulate the amount of Net Sales. Net Sales = Gross Sales – Sales Returns and Allowances – Sales Discounts. Cost of Goods Sold is the carrying value of goods sold and does not include overhead costs, payroll, taxation, and interest payments. Gross profit is presented on a multiple-step income statement prior to deducting selling, general and administrative expenses and prior to non-operating revenues, non-operating expenses, gains and losses. When you are calculate Gross Profit, you need to consider the total amount of fixed and variable costs. You should distinguish between variable and fixed costs. Variable costs are costs that change based on the amount of the product being made. These include Materials used, direct labour, packaging, freight and depreciation. Fixed Costs are more static in nature and include office expenses, salaries, wages, advertising, insurance and rent. To know if your business is run successfully, it is equally important to compute the Gross Profit Margin. Gross Profit Margin is the ratio of gross profit to total revenue expressed as a percentage. Gross profit margin is a tool to compare your business with your competitors or the industry standards. It can also be used to compare your company’s current state to its past performance, especially in markets where the price of your goods can fluctuate significantly. The higher your gross profit percentage, the healthier your business and the more profit you’ll take home at the end of the day. Gross Profit Margin is important because it allows you to keep an eye on profitability trends. Businesses get into trouble by having an increasing gross profit and a declining gross profit margin. Gross Profit Margin = Gross Profit / Sales. To Increase Gross Profit Margin, you should increase prices and decrease costs. When you calculate Gross Profit will help you understand how efficient your business is based on the production of goods and services and explain the amount of earnings that you are available. The Gross Profit Margin will help you determine the percentage of money earned from selling goods or services. Therefore, it is important to determine the Gross Profit to determine the efficiency, profitability and success of your business.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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