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- Low Gross Profit Margin vs. Low Net Profit Margin
- Key Advantages & Disadvantages of Using a Static Budget
- How Are Financial Statements Different in Different Industries?
- The Difference Between Contribution Margin and Gross Margin
- What Is the Difference Between Net Income and Profit Margin?
When a company is making financial decisions, one crucial piece of information that it needs is the gross profit figure. Gross profit is the amount of revenue that a business makes minus its expenditures. Gross profit also is referred to as "gross margin" and "gross income." Overhead, which is classified as an indirect cost, consists of expenses like utilities, rent and insurance. Once you determine your gross profit, you can better decide how to make adjustments in overhead expenses.
Keep exact records of all of money made from sales and revenue, as well as outgoing money for expenses.
Add incoming money related to sales. For example, consider a three month period in which a company earns $10,000, $12,000 and $8,000. The total for these figures would be $30,000. This would be the business' gross profit for that period.
Add all of the expenses related to the company's sales for the same period. For example, you might have $5,000 in utilities, $1,000 in advertising and $10,000 in salaries. The total expenses for this period would be $16,000.
Subtract the total expenses from the gross profit to find the net profit. In this example, you would subtract $16,000 from $30,000 to get $14,000 net profit.
Adjust overhead accordingly. If you find that your gross profit is large enough to accommodate an increase in overhead expenses, then you could theoretically make this change. However, if the gross and net profit figures were lacking, you might have to cut expenses in other areas if you think that overhead needs to be increased. You also might want to reduce overhead expenses if possible if they are taking too much away from your gross profit.