Knowing your numbers is important, but often it’s easy to mix up what Gross Profit or Net Profit mean.
What’s the difference?
It’s generally accepted you need to ‘know your numbers’, but it’s often difficult to appreciate what this actually means. Well, let’s get you started with some jargon busting knowledge.
This is one of the most common and important numbers you will want to know in business.
This is what you make after you pay for the costs associated with making your ‘product’.
When looking at this, you only deduct costs that actually went into make the product/service. We mean actual materials and direct labour used.
As an example, if you sell Ice Creams for £5 a pop and they cost you £3 to make, your gross profit is £2.
People often like to use percentages to demonstrate this number. In this example, to figure out your ‘gross profit margin’ you would divide 2 by 5 = 40%.
This is great because you can use that percentage to work out what you would make if your sales increase, or decrease. For example, if you sold 10 ice creams, you would just do £50 x 40% = £20 gross profit.
Net Profit is left after you take out all of your other costs. Also known as ‘overheads’ such as rent, telephone, accountancy etc out of your gross profit.
Often referred to as ‘the bottom line’, this is what profit is left at the end, after all the running costs are paid.
This won’t however include things like loan repayments. This is slightly long winded and best left for another article!
There we have it, two terms in two minutes – now you ‘know your numbers’ a little better!