What is Gross Profit?
Simply, it’s how you compare apples with apples.
You make a sale. It might be a something you made – a handbag, a cupcake, or a shoe. It might be something you do – a report you’ve written, organising finance or insurance, bookkeeping or cleaning.
It costs you something to make that sale – the leather for the handbag, or the flour for cupcake, or employees wages to do the review or write the report, plus your time.
Every expense you have that contributes to the sale is called a cost of sale, or cost of goods sold (cogs). Your total cost of goods sold for a year will depend on how many sales you make. It’s a variable cost, that means it goes up or down depending on how many sales you make.
Your Gross Profit is the amount left after you’ve paid for the cost of making what you sell.
Pretty simple right?
But if your sales change every month, and your costs are different every year, how do you compare year to year or month to month how well you are doing?
It’s simple – you use a percentage.
The Gross Profit percentage in fact.
Yes, it’s a number, and yes, it can be confusing. But all it really is, is a way to tell how you’re doing from one time period to the next so you can compare apples with apples.
Want some more detail? I’ll give you an example.
Let’s compare two sales periods – LAST month and THIS month.
Sales last month totaled almost $4k and you sold 40 items. You made $1,360 profit.
You knew your wages were going to increase from $22 per hour to $24 per hour so you decided to increase your sales price to cover the extra cost.
But will raising prices cost you customers? And will it cost you profit?
Let’s look at what happened this month.
What do all these numbers tell you?
Well, sales went down. You sold 5 less items and you made $30 less profit this month than you did last month.
If you didn’t look any further you would be costing yourself money because
the numbers are telling you a story
In fact, even though your sales were $300 lower, your Gross profit was only $60 lower. That’s actually pretty amazing.
The profit per item sold is $3 higher this month than it was last month despite your higher costs. So you made more for each sale.
But if you don’t know your profit per item, or you don’t have time to work it out, you can use your Gross Profit percentage to tell you instead.
The Gross Profit Percentage let’s us compare Apples with Apples.
The Gross Profit percentage is 38% this month – higher than last month’s 36% by 2%. This is despite higher costs and lower sales.
So you know you made the right decision to increase the price.
And if you can increase your sales by just one item a month your Gross Profit (cash) will be even higher than it was last month.
You can download your free Gross Profit Calculator by clicking here: Gross Profit Calculator.
Listen to your numbers, read their story, and watch your business Bloom