This set of blogs will take you behind some of the metrics you should be measuring in your business. We’ll talk about what they are, what they really mean and more.
Today we’re talking about something you more than likely care about in your business: PROFIT.
But what exactly is it? Bottom-line profit is when you have more revenue (sales) than expenses.
Yes, there’s more than one kind of profit. Or rather, more than one way to measure profit. These three types include: gross profit, operating profit and net profit. And they’re all three found on your income statement.
This is your total revenue minus the cost of goods sold. In other words, it’s the amount of money you’re getting from your customers less the expenses it took to make your product or provide your service.
Revenue – Cost of Goods Sold = Gross Profit
Operating profit is your profit from your core business functions (the reason you’re in business in the first place).
The difference between gross profit and operating profit is pretty straightforward. Gross profit is a direct look at your revenue after expenses from sale. Operating profit looks at profitability after you take into account your operating expenses. We’re talking salaries, administrative costs, etc.
Gross Profit – Operating Expenses = Operating Profit
Consider this how much profit you make after you take into account ALL of your revenue and expenses.
Operating Profit ± Other Income & Expenses = Net Profit
Other income and expenses? We’re talking investment income, income (or loss) from sale of property and equipment, interest income or expense, taxes, etc. This is your “bottom-line”.
But wait, there’s more.
Along with your profit is a fun thing called profit margin. These profitability ratios helps show the financial health of your business. Profit margins can be looked at as a trend (this year compared to last year, this month compared to last month, etc.). Or you can benchmark yourself against similar companies to gain a better understanding of how you compare to your peers.
By monitoring your profit margins, you can see if what you’re doing is working or if you need improvement. Further, it will help you forecast (budget) your future revenues and expenses. It’s pretty powerful.
Of course, as you may have guessed, there’s more than one type of profit margin.
Gross Profit Margin
Gross profit margin looks at the percentage of revenue left over after you account for all of your costs of goods sold. It’s calculated by taking gross profit and dividing it by revenue.
Gross profit margin tells a story (you knew it was coming) about how effectively and efficiently your business is producing your product or providing your service.
Net Profit Margin
Net profit margin looks at the big-picture of your business. It portrays the percentage of revenue that actually turns into profit for your business. It’s calculated by dividing net profit by revenue.
Net profit margin is particularly important for your business because it gives you a bottom-line view of your profitability and overall health.
The moral of the story
Profit and profit margins are among some of the most important metrics to track for your company. They give you a picture of where you’re currently at, what’s working (and what’s not) and can even show you where you could be headed in the future.