Have you ever heard of the term gross profit? Maybe we heard the net profit more often, right? Just because it’s called dirty, doesn’t mean that it’s literally meant to be illegal. But certainly, net profit and gross profit are two different things even though there are both the words “profit”. Let’s discuss this with more information! Meanwhile, if you also need a reliable bookkeeper to work for your company, we recommend you call Bookkeeping Services Parramatta.
Gross profit is a term in a business where the gross profit is derived from the total value of sales minus Cost of Goods Sold (COGS). Simply stated, gross profit is the remaining total profit from all production costs that have been accounted for.
Gross profit is very useful for making residual income calculations that can be used for sales, administration, and even tax purposes.
Gross profit does not include fixed costs such as insurance, marketing, salaries, rental fees, and those that are not directly involved in the production process and office equipment.
Costs for these needs must be paid regardless of the intensity of the expenditure. Gross profit is used to measure the efficiency and effectiveness of the use of fixed costs, labor, and inventory. From this, the company can evaluate and improve the work performance of its employees.
Earnings obtained by a company are certainly different from one period to another as profits have the opportunity to fluctuate according to certain conditions. It is not impossible that it is influenced or caused by several factors, such as the selling price of goods or services, the number of goods and services, and the Cost of Goods Sold.
Gross Profit Margin
Gross profit margin is the ratio of gross profit to the amount of revenue described in percentage. Margins are a great way to compare one company with its competitors to see the industry’s average profit.
A good company is a company with high and stable gross profit margins, which is a sign that the company can reduce the cost of goods sold to produce the expected profit and exceed the target.