Gross Profit or Net Profit

In the business world it is important to know the difference between gross profit and net profit. If you are selling products or services, which is most small businesses, you really want to understand how your gross profit and net profit affect your bottom line. Your gross profit is the amount of money you have left after all your expenses relating directly to your product, or your Cost Of Goods Sold (COGS). This is determined by what costs you have that are directly related to your product, for example; if you are producing a product, any cost in manufacturing the product would be a COGS, any specific advertising for that particular product is a COGS. Again Cost of Goods Sold refers to the costs that are directly related to your product. On the other hand you have expenses or as they are also called Overhead. Your overhead expenses are fixed expenses that occur periodically whether you are selling a product or selling ten different products, for instance, your Internet bill is an overhead expense, or your business phone is an overhead expense, or any other office expense incurred. So your gross profit is the amount of money you have left after you factor in all your COGS. Then you deduct your fixed expenses or Overhead expenses from that balance, this is your net profit. SO why is it important to know what your gross and net profit are. Think of it this way, if you have a product that generates a gross profit of 40% and another product that produces a 10% gross profit, which product do you want to sell more of? Exactly, this is why you need to know how to calculate what your gross profit is so you can determine what product or service you want to focus your marketing efforts on. Products that have a lower gross profit are not necessarily all bad, they can help generate some income, but you need to generate the appropriate amount of gross profit to cover your overhead expenses. Your overhead can be calculated based on your COGS. This is important so you know what your gross profit margin or percentage needs to be. If you have an overhead expense of 25% of what your gross COGS is and your gross profit on a particular product is 10% you may want to rethink that product. Now you can see why it is important to understand the difference between the two types of profits. This may seem somewhat technical but it is very important to understand this concept to ensure the profitability of your business.