A Comprehensive Guide To Unsecured Business Lines of Credit
An unsecured business line of credit can be invaluable. It acts as a financial safety net because it provides... Read More
Gross profit | Operating profit | Net profit | |
---|---|---|---|
How it's computed | Revenue - COGS* | Gross profit - operating expenses** | Total revenues - total expenses |
Which expenses are considered for calculating this type of profit? | Raw material costs, direct labor, shipping costs, cost of goods purchased for resale | All the costs considered for calculating gross profit plus costs like rent, expenses on utilities, advertising costs, depreciation, and amortization | All expenses incurred by the firm |
Why it's used | It reveals your operational efficiency | It tells you about the financial performance of your core business activity*** | Also known as net income, this is a measure of your firm's overall profitability |
Cathedral Bakers' income statement for 2018 | |
Amount in $ | |
Revenue | 50,000 |
---|---|
Cost of goods sold | 30,000 |
Gross profit | 20,000 |
Employee costs (not included in the cost of goods sold) | 4,000 |
Rent and utilities | 2,000 |
Advertising | 1,000 |
Total operating expenses (4,000 + 2,000 + 1,000) | 7,000 |
Operating profit (Gross profit - operating expenses) | 13,000 |
Interest cost | 1,000 |
Tax | 1,000 |
Net profit (13,000 - 1,000 - 1,000) | 11,000 |
Do you want to learn more about each type of profit? Keep reading!
Gross profit = Revenue - Cost of goods sold (COGS)
You should remember that the revenue figure indicates net sales. Net sales are calculated by deducting discounts from the sales amount. You also need to reduce the sales amount if customers have returned any goods. To calculate your gross profit, you also need to know the cost of goods sold. These are the costs that are directly incurred for producing sold products. Some of these costs are:Gross Profit Rate = (Gross Profit x 100) / Revenue
Gross Profit = $100,000 - $60,000 = $40,000
Gross Profit Rate = ($40,000 X 100) / $100,000 = 40%
Once you carry out this calculation, you can use the gross profit rate to estimate the gross profit you would make with an increase in sales.Operating profit = Revenue - cost of goods sold - operating expenses - depreciation - amortization
Which expenses are considered when calculating the operating profit? All costs that are incurred for your business activities must be taken into account. Here are some of these costs:#CaminoTip Don't assume that net profit and the cash that your business generates is the same thing. In fact, the two are quite different.
Net profit = Total revenues - total expenses
Net profit = gross profit - operating expenses - other expenses (such as taxes and interest paid on debt)
Diego runs a small auto repair shop. At the end of the financial year, he raises an invoice on a customer for $1,500. The payment is made by the customer to Diego after two weeks. In this transaction, the sale took place before the year-end, but the cash was received in the new financial year. To put it another way, Diego made a credit sale in YEAR 1 and received the money due to him in YEAR 2. In YEAR 1, the revenue of Diego’s company would increase by $1,500, but there would be no effect on the cash balance. Remember that the cash was received in YEAR 2. In other words, in YEAR 1, the net profit would be higher without a corresponding increase in the cash balance.However, there are ways to convert profit into cash. One of the ways to do this is to focus on collecting the money that is due to you from the credit sales that you have made to customers. There's another measure that you can take to increase your net profit. You could lower the interest cost that you pay on borrowed funds. Camino Financial offers small business loans at reasonable rates of interest. You may discover that taking a loan from us could lower the amount you pay towards interest.
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