Gross profit is revenue minus cost of goods sold, while net profit is gross profit minus overhead costs. Net income is a more accurate assessment of a company’s earnings. Profitability is evaluated by reducing costs and increasing profits through cost of goods sold and overhead. A company’s earnings determine its value, especially for shareholders. An income statement shows annual sales, cost of goods sold, and expenses. Profit can be expressed as a percentage of gross or net profit margin.
Gross profit and net profit are terms to describe the revenue of a particular company. Gross profit is the income a business receives less the actual cost of items sold. Net profit is gross profit minus overhead costs, such as wages, utilities, and other expenses. Net income is a more significant number than gross because it represents a more accurate assessment of a company’s earnings.
A company’s gross profit and net profit are used to evaluate the profitability of a company. There are ways to reduce costs and increase profits, which fall into two categories: cost of goods sold and overhead. Cost of goods sold is an accounting term used to describe the actual cost of an item sold by a business. For example, if a business buys and resells bicycles, the cost of goods sold would be the actual price paid for the bicycles by the wholesaler. Gross profit would be calculated by taking the bicycle company’s annual sales minus the cost of goods sold.
The second way to reduce costs and increase profits is to consider overhead costs. Overhead costs are all costs that are not directly related to the actual product bought and sold. These include wages, taxes, utilities, etc. Overhead costs are not used to calculate gross profit, only net profit. The net income in the above example would be calculated by taking the bicycle company’s annual sales and then deducting both the cost of goods sold and overhead costs.
The goal of any business is to maximize profitability, that is, to make money. A company’s earnings are used to determine its value. This is especially true with companies that have shareholders. Those who hold shares in a company expect dividends from the company’s profit, and gross and net profit play a significant role in a company’s valuation.
A company’s profit is shown in an income statement. This is a report that shows your annual sales, cost of goods sold, and all other expenses. The report can further break down a company’s expenses into categories, such as wages and utilities. If cost of goods sold plus expenses equals more than annual sales, then a business is operating at a deficit and is unprofitable.
A company’s profits can also be described in terms of percentages. A percentage of gross profit margin is equal to gross profit divided by annual sales. A percentage of net profit margin is equal to net profit divided by annual sales.
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