When you look at your accounts, can you read your profitability? Here are some things to look for.

Gross profit

Gross Profit = Net Sales – Cost of Goods Sold

Gross profit is the difference between revenue and the cost of goods sold (or services provided). It appears before administrative expenses and general overheads are accounted for. Ideally, gross profit covers your overheads as well as generating your targeted profit, your net profit.

Net profit

Net Profit = Total Revenue – Total Expenses

Net profit is what you're going for – it is the actual profit after all expenses and overheads have been paid.

Gross profit percentage

Gross Profit % = Gross Profit/Sales x 100

Gross profit percentage is the ratio of your gross profit in proportion to your sales.

Gross profit percentage is a useful indicator of production efficiency and financial health. Ideally, it is fairly stable, barring drastic upheavals in your business or industry. A drop might mean one of a number of factors which need to be corrected, such as a rise in costs, waste or bad debts.

In a competitive market, where benchmarking data is available, you might compare your business' gross profit percentage to that of your competitors and take steps to make sure you keep your edge. Gross profit percentages can vary widely across different industries. For example, the gross profit percentage for software businesses is higher than that for food and beverage businesses.

Changes in gross profit percentage might also mean increased competition in the market or increasing demand from customers for discounted products or services. It could be a response to changes in the business, such as expansion driving increased production costs or a higher wages bill.

Keeping track of your profitability gives you the big picture on your business. The key metrics that indicate profitability are all windows onto the big picture. Understanding them will help you set goals and drive growth

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