Gross profit is revenue minus cost of goods sold, while net profit is gross profit minus overhead expenses. Companies can increase profits by lowering costs in these two categories. Profitability is important for determining a company’s value and satisfying shareholders. Profit and loss statements and profit margin percentages can also be used to assess a company’s profits.
Gross profit and net profit are terms to describe the revenue of a particular company. Gross profit is the revenue a business receives minus the actual cost of goods sold. Net profit is gross profit minus overhead expenses such as salaries, utilities, and other expenses. Net profit is a more significant number than gross because it represents a more accurate assessment of a company’s earnings.
The gross profit and net profit of a company are used to assess the profitability of a company. There are ways to lower costs and increase profits, and they 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 items sold by a business. For example, if a company buys and resells bicycles, the cost of goods sold would be the actual price paid for the bicycles to 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 decrease costs and increase profits is to look at overhead costs. Overhead costs are all costs that are not directly related to the actual product bought and sold. These include salaries, taxes, utilities, etc. Overhead costs are not used to calculate gross profit, only net profit. The net profit in the example above would be calculated by taking the bicycle company’s annual sales and then deducting both cost of goods sold and overhead costs.
The objective of any company is to maximize profitability, that is, to make money. A company’s earnings are used to determine its value. This is especially the case for corporations that have shareholders. Those who own shares in a company expect dividends from the company’s earnings, and gross and net earnings play a large role in a company’s valuation.
A company’s profit is shown on a profit and loss statement. This is a report that shows annual sales, cost of goods sold, as well as all other expenses. The report can further break down a company’s expenses into categories, such as salaries and utilities. If cost of goods sold plus expenses equals more than annual sales, then a company is operating at a deficit and is not profitable.
A company’s profits can also be described in terms of percentages. A gross profit margin percentage is equal to gross profit divided by annual sales. A net profit margin percentage is equal to net profit divided by annual sales.
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