Gross Profit

Gross Profit — is the income which is left after deducting the costs of production. Gross profit doesn’t take into account the amount of SG&A, so it can be used to make forecasts in the short and medium term. The higher the gross profit, the more successful the company is. 

Components of Gross Profit

Gross profit indicates the sum of earned money and how much a firm can spend on itself. Gross profit is similar to balance profit. However, balance profit includes whole income before taxes, and gross profit incorporates the income before taxes and additional expenses. 

Gross profit includes several things:

• income received after the sale of manufactured products;
• receipt of funds provided for the performed services or goods;
• profitable transactions under contracts for the sale of equipment and other assets of the organization;
• amounts credited to the company's accounts for shares purchased from it.

Differences Between Gross Profit and Net Profit

Net profit is another important indicator. However, these indicators have several differences. Gross profit includes various expenditures like taxes and deductions. Therefore, part of this amount should be directed to certain needs. Net profit is the finance that will remain from the gross profit after all payments. It’s a sum that can be put in the safe. 

Comparison of gross profit and net profit:

Factors Impacting the Gross Profit

The gross profit depends on various factors. They can be internal or external. Internal factors are related to the company and its work. External factors are related to the economic crises.

 Internal factors influencing the gross profit:

• price and quality of a product;
• competitiveness;
• expenditures of promotion and advertising;
• cost of delivery;
• turnover rate;
• release of goods.

External factors influencing the gross profit:

• rate of exchanges;
• tax rate;
• demand fluctuations and their regulation;
• dumping of competitors;
• economic situation in the world;
• penalties;
• force majeure.

Calculation of Gross Profit

Identification of gross profit is quite simple. Here is this formula: Gross Profit = Net Sales — CoGS.

Net sales is the difference between gross sales and all discounts, returns, and other bonuses provided to customers. It’s the total amount of sales made by the business after all deductions have been taken into account.

CoGS is an abbreviation for Costs of Goods Sold. These are the expenditures of business attributable solely to the volume of sales in the reporting period plus production costs and salaries. 

This indicator can be computed for a month, quarter or year. The larger the company, the more often it needs to be calculated. Companies should allocate expenses timely and correctly. Small businesses can count it once a year because the annual revenue is uneven. One quarter can be more profitable than another.  

The company can use specific accounting software for easy calculation of the gross profit. There are many programs like FreshBooks, Xero, QuickBooks (Online and Self-employed), and Wave. These servers are suitable both for legal and juridical persons. They are presented in most online stores in different countries. Working with them is easy. Every software has a support team that can contact the client if there is any problem. However, in some countries, local developers offer their services. It is important to use the licensed programs because the free downloaded files can include viruses and Trojan horses. The licensed program, on the contrary, provides you with the guarantee of the developer. 

The calculation of gross profit is necessary for a business. It allows the management to identify which expense is too big: production costs or indirect expenses. Besides, this indicator reflects how the firm spends the funds. The revenues don't show the efficiency of the firm. 

Calculation of gross profit is necessary for the following things:

• optimization of the expenditures;
• defining the appropriate cost of the product;
• forecasting the payback;
• defining the difference between the prime cost of goods and the income from the sales;
• analyze the productive resources;
• planning the work and development of the company;
• identification of the problems and vulnerabilities. 

However, the gross profit isn't enough to make a decision concerning the business. You need the gross profit margin to receive the data on efficiency. Gross profit margin is a ratio that represents the difference between revenue and cost of goods sold, expressed as a percentage of revenue.

Gross profit margin reflects how much money from the proceeds the company has left after one or another step in calculating profits. It helps to estimate the profitability of the business by comparing the amounts “taken” by one or another expenditure.