What is gross profit? The exact gross profit formula (updated 2021)

What is gross profit? Whether gross profit has any effect on the business performance of a business. Why should we pay attention to gross profit in business? In this article, VaytienAZ will help you understand more about gross profit and the role of gross profit in business

What is gross profit?

Gross profit which is understood as the amount of profit earned after revenue minus the capital that you have to spend to do business. Is the difference between the firm’s revenue and the cost of goods and services.

gross-profit

The diferrent between gross profit and net profit (profit after tax)

Gross profit: The amount earned after selling goods and providing services. This proceeds is called revenue and after subtracting the cost of goods / services, it will generate gross profit.

Net profit (Profit after tax): It can be said that this is the pocket profit of the business. This means that profit after tax is the interest after deducting all selling expenses, administrative expenses, tax expenses, …

Gross profit formula

The standard formula for calculating combined driving for those who are looking to learn about combined driving.

Gross profit = revenue – cost of goods used.

Gross profit rate (%) = gross profit / revenue

In which: gross profit and gross profit are actually different names, but the essence is completely the same.

Through the gross profit rate, you will know how much profit the company will make after subtracting all business expenses.

After understanding what gross margin is, the next thing you need to find out is what the gross rate is. Accordingly, the gross margin coefficient is the profit margin displayed as a % of sales. One can know exactly how much profit is through this compounding rate.

In addition, many businesses also apply this method of calculating the gross interest rate to compare interests between years. It helps people to evaluate the development of the business or the company. The gross margin will display as%.

If a business has increased revenue, that cannot confirm whether business performance is better or not. That one needs to base on whether the rate of profit increases or decreases to determine.

Revenue increases, but profits decrease, which means lower business efficiency. From here, businesses will consider and know how to adjust input factors, materials and raw materials increase, marketing costs increase, …

In case the revenue is replaced by net revenue, the gross profit is calculated as follows:

Gross profit margin (%) = Gross profit / Net revenue.

In which, the gross profit margin is the same as the gross profit rate, helping businesses to compare with other businesses in the same field.

The meaning of gross profit

The first factor that investors pay attention to is gross profit to evaluate the business situation and profitability of the business. If the difference between the revenue and the gross profit is higher, it is possible to evaluate the good performance in the production process of product / service (in the condition of equal market selling price).

If the cost of production is found to be close to or higher than your revenue, you can lower your cost of capital by finding less costly ways to produce your goods or increasing your revenue by expanding your marketing efforts.

As cost of goods sold increases, gross profit decreases, and operating costs decrease. Conversely, when cost of goods sold decreases and gross profit increases, more can be spent on operations

What is the role of gross profit?

Clearly as the definition and example above, the gross profit is the first factor that determines the profitability of an effective business or not? From there should invest in the Enterprise or not?

In addition, the tracking of gross profit also helps enterprises to determine whether their business is on the right track or not? Need to overcome at any stage? Based on the gross profit we can determine this:

Negative gross profit (-): means that your business is inefficient, shows signs of going down and is making up for losses. In this case, it is necessary to find out the cause to overcome.
Gross profit at a positive level (+): means that the business is making a profit and developing. Enterprises can continue to invest to increase profitability or expand new products or markets.
Monitoring the volatility of gross profit helps businesses determine the proportion of costs to revenue, thereby taking reform measures to improve business efficiency.

Business evaluation

The gross profit ratio can assess whether the business is making a loss or making a profit. Sometimes on the financial statements, it can be seen that the gross profit is positive, but it is not necessarily that the business has made profits.

If the gross profit is too small or negative, it can be seen that the business is losing money because production costs are reaching a high threshold, making COGS close to selling price.

This is a necessary job for businesses to self-assess and adjust in business plans, adjust personnel as well as adjust production operations.

Business field evaluation

Gross profit represents market demand for the sector in which you are in business and invest.

The more gross profit, the greater the market’s demand and interest in the product. Businesses need to use this as a momentum to make business development goals and orientations.

On the contrary, declining gross profit means that enterprises need to have a plan to adjust and develop new areas to gain profits.

Compare with competitors in the same industry

Gross profit enables businesses to compare revenue with competitors in the same field in order to find a method of healthy competition but still bring high profits.

In a business model, the product / service is sold to the new market at equal and competitive prices. Your business cannot raise prices to make a profit, so the problem of production costs is the most competitive weapon.

When the enterprise has a better plan to reduce production costs while still ensuring quality, the enterprise will stand firm in the market.

In a year if your gross profit is less than that of your competitors, you need to find out where the cause is (may come from higher production costs or ineffective marketing strategies, …).

This is an effective way of comparing business between businesses, helping to find the right path.

Why the cost are low but the gross profit is high in some cases?

Most businesses achieve stable growth goals, but there are still a number of cases where low cost businesses have high gross profit, specifically:

  • Convenience stores and door-to-door delivery
  • Trading in clean vegetables and fruits online
  • Sell take-away drinks
  • Selling clothes, home appliances online
  • Small retail stores sell mini bonsai and ornamental birds directly and online

Summary

Gross profit is not the final profit that an enterprise receives in the business process, but it will assess the profitability and stability of that business in the market.

When manufacturing and trading products / services, you need to balance the production cost, cost and quality. Low original price means you are more likely to beat your competitors, and the quality helps you retain customers.

Above are information related to gross profit, gross profit. If you understand what gross profit is? Please share this information with colleagues or friends if you find it helpful.

Refer: Gross profit – Wikipedia

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