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What is Gross Profit?
Ahh yes, that golden word we all love to hear. Profit. It rolls off the tongue nicely, but how do you properly track profit in your business and what are the key metrics you should be looking at?
Working out pure profit comes down to tracking things well and accurately and there are a couple of nifty ways you can do so!
Direct costs such as product cost, shipping (both in and out) direct wages and incidentals are one half of the pie, with over heads like rent, motor vehicles, insurance, sales and marketing, repairs and wages (like admin) also need to be considered as well.
So how do we work it all out? We’re glad you asked. FORMULA TIME.
Sales Income – Direct Costs = Gross Profit
Simple right? Yep!
So how do you know what products are the most profitable for your business? That’s the key metric. For example if you’re pouring money into marketing a product, you want it to be the one that sells right?
What about Gross Margin?
This is where you calculate the percentage of Gross Profit when compared to sales income.
So, if you sell something for $1500 and your direct costs are $1000, you have a profit of $500.
That $500 is 33.33% the cost of sale, leaving you with a gross margin of 33.33% and a metric you can use to track your most profitable products. It might sound simple, but many businesses order a ton of stock, not really considering which product gives you the greatest profit margin in your business.
This metric also helps show whether the product that sells for the most, actually yields the most profit. Sometimes it's not the case.
Why is it important to understand your gross margin?
· You know what’s leftover to pay your overhead expenses.
· The lower the margin, the higher your sales need to be to generate a healthy profit.
· The lower your margin, the higher return on you marketing & sales activities you need to achieve.
· This magic number, when combined with a few others will help you to calculate your break even (how much revenue you need to cover ALL you costs – keep an eye out for a blog on that soon).
Need a hand calculating yours? Give us a shout!
Or, download your very own calculating tool here.
