How to Distinguish Between Net Profit and Gross Profit

Keeping score of business means knowing all about profit.

Run your business on gross profit. Take net profit to the bank. Can you calculate each of them? Actually, it is easy to do and once you know how, you will become a whiz at it.

Instructions

1. 

   Add and then subtract.

   Count all money received from sales of merchandise or services provided during a specific time period -- day, week, month or year. Accountants call this number "sales" or "revenue." Add up all of the costs incurred to make or buy the items that produced the revenue number you calculated. Accountants call this total "cost of goods sold." Subtract the total cost of goods sold from total revenues, and the result is gross profit for the time period in question.

2. 

   Costs are part of the mix.

   Consider this example: Assume that you bake chocolate chip cookies. If the flour, sugar, eggs, milk and chocolate chips used to make a dozen cookies cost $1, and it takes 30 cents to run the oven, and 20 cents for packaging, then cost of goods sold equals $1.50 per dozen. Subtracting that from the $5 sale price, gross profit is $3.50 per dozen. Assume that, in a month, you sell 1,000 dozen cookies. Your monthly gross profit is $3,500 -- $3.50 per dozen multiplied by 1,000 dozen.

3. 

   Take it to the bank.

   Tally up all the other monthly costs incurred to run the business, and that means everything -- salaries, rent, utilities, shipping, insurance and taxes, to name just a few. That number is called "operating expenses." If these operating expenses add up to $2,500, then net profit is $1,000 -- $3,500 gross profit less $2,500 operating expenses equals $1,000 net profit.

   Smile, and take it to the bank.

4. 

   Your net profit will make your bank account grow.

   Copy this down and tape it to your computer screen: Gross profit equals sales minus cost of goods sold. Net profit equals gross profit minus all operating expenses.