What is Gross Profit and Why Is It Important?

Most business owners understand what net profit is for their business and is mainly what they look at. The net profit of a business is the funds that are left over after the expenses are subtracted from the income that came in. Most businesses pay attention to this and this alone.

There is a more important measure and that is Gross Profit.

Very few business owners actually understand what gross profit is and how to calculate it. If they do understand what gross profit is, they usually don’t know what goes into it and don’t have a way of calculating their gross profit properly.

So, what is gross profit?

Gross profit is the amount of money that is left over after the sale of a product or service and after one has accounted for all the costs involved in delivering or selling that product or service. For example, if one works in a landscaping company and must mow lawns or install plantings:

• count the hours of labor as an expense in producing that product
• count the gas used to get vehicles to the job
• count the materials needed within the job
• count the maintenance of the tools required for doing the job.

These are all part of what are called “Costs of Goods Sold” and when subtracted from the income taken in, from the customer, it gives you your Gross Profit.

Why is this amount so important?

Gross profit is important because one can then use that number to determine whether one should raise their prices or just sell more products.

For example, if your gross profit is so low that you’re losing money doing a job or the profit is just too low to cover overhead, by selling more products or services, you could actually sell yourself out of business.

However, if your gross profit is high enough, then you sell more, and you will have a better net profit. It’s an important distinction to make.

One needs to know this factor cold in order to manage your business fully. When you have a properly calculated gross profit, you can plan your future in sales and delivery.

At Wendy P Corp, we help you to determine your correct gross profit for future expansion of your business.