We’re talking about how to understand gross profit, net profit, and profit margin.
I can’t believe that there’s many people out there that don’t understand these basic principles of profit. So we’re going to discuss this here, right?
This applies across the board, and there’s going to be several different ways to calculate gross profit, net profit, and profit margin, but they all apply the same principle, and they all apply the basic same formulas across the board.
What you use to calculate it might be different in different verticals and industries.
I come from the moving industry, so I’m going to use the example of a moving service, right? But this will apply to any business out there.
Figuring Out Gross Income
Gross income, that is the exact sale of the job. In the moving industry, we sell a moving job and that job could be $2000, $3000, $4,000, whatever it is.
Tax account, maybe it’s the cost to do the taxes.
Chiropractor, it’s $100 for an adjustment.
Lawyer, maybe it’s $500 an hour kind of thing.
But the idea is that one particular service has this gross income.
This could be whatever it is, and I’m going to use the example of a moving industry. And I’m just going to just go out there and say, this job is $1,000.
It’s 1K, a thousand dollars, and that’s just a hypothetical. It could be whatever. I’m just trying to make the math easy.
This job is $1,000, what is the gross profit?
This area is the cost of goods sold. That’s your direct expenses.
In the example of a moving job, this would be your labor. So however many guys you use, and if you rented a truck, it could be whatever the truck costs. Out of $1000, hypothetically, this is going to be $300, right? The cost of goods is $300 or 30%, if you will. And this will be $700. So your gross profit from the gross income is $700.
Okay, good.
Figuring Out Net Profit
How do we figure out net profit?
Now, we take the growth profit, and that’s what all of this is. This is the gross profit. And then, we have to minus out all the operating expenses, you got to minus out your taxes, you got to minus out your interest, right? And this is operating expenses, so that could be your marketing, that’s your websites, that’s gas, fuel, rent, so on, so forth. Then, you’ve got your taxes.
You have any loans or anything, the interest on those loans, etcetera, or any interest on anything, these are your operating expenses.
What you have left over that is your net profit.
Out of this $700, the $600, that is all your operating expenses and your taxes.
Your net profit is $100. Okay.
Figuring Profit Margin
How do you figure out your profit margin?
It’s net profit, divided by revenue, which is your gross income.
Your net profit divided by your gross income equals your profit margin.
Our gross income in this case is $1000.
Our net profit is $100, so that equals… So it’s 10%. Your total is 0.10, right? Well, then, you times it by 100, and then that’s your percentage, so it’s 10%. In this case, your profit margin is 10%, right? Your net profit is 100, and your gross profit is $1000.
Understanding Profit
How does this correlate to your business?
A lot of people don’t understand what gross profit is and if they are going to understand it, they’re only going to understand this particular principle, right?
But a lot of people confuse what the cost of goods are versus all the other operating expenses, et cetera are, so they kind of mix between what gross profit is and what net profit is.
It’s not that hard of a concept when you actually look at it here by the board.
You got your overall price.
Your gross profit is your gross income minus the cost of goods.
Then, your net profit is the profit that is left over after you take out all the other expenses that are involved.
And from your net profit, you’re then able to get your profit margin.
Improving Your Profit Margin
How do you get your profit margin higher?
You”ll want to reduce expenses.
You want to find a way to reduce expenses.
One of the biggest expenses is payroll, right?
The problem in reducing payroll is then you get less quality of people typically. And that then goes into less quality of service or goods produced and provided.
Sometimes, you gotta make that trade-off and that’s where you get to know your different other KPIs, which are key performance indicators, right?
You can reduce your taxes.
You have to reduce your interest.
The way you reduce interest is you pay principal more than you pay interest. A lot of people with credit cards or loans pay the bare minimum.
Profit Glossary
COGS means the cost of consumer goods.
E your operating expenses.
I is for interested.
T for taxes.
If you want to increase your profit margin, you have to learn how to lower these expenses.
But you have to learn how to lower those in a way that’s going to increase your revenue as well as increase your profit margin.
Summary
Understanding what profit margin is, net profit, and gross profit is, and really understanding everything that goes into each one of those categories will really greatly improve your company’s performance, increase its quality, and increase its longevity.
If you’re finding that you’re operating and you don’t have enough cash flow and so on and so forth, maybe go back to the basics and learn the basics.
Guys. I hope you learned something about this. Hope this was beneficial. I hope you were able to understand gross profit, net profit, and profit margin, and how they relate to one another, and how they work and are different from one another as well.