- What Is the Difference Between Return on Sales vs. Gross Margin?
- How to Calculate Total Margin Financial Ratios
- What Is a Realistic Gross Margin Goal?
- What Is the Difference Between Net Income and Profit Margin?
- How to Calculate the Percentage of Total Monthly Net Income
- Low Gross Profit Margin vs. Low Net Profit Margin
Owning a business requires you to keep track of revenue and profit. If you are not familiar with business accounting terms and how to measure your company's success, you risk compromising the financial health of your enterprise. Basic business accounting includes understanding the difference between sales revenue and gross profit to track your company's progress and make changes when necessary to increase your income.
Profit and loss statements are necessary to qualify for business loans or attract investors to take your company to the next level. Your final numbers are based on important items that include the number of products that move through your business, the cost of making or buying them and the expense to run your company. If your reporting is not accurate, you risk losing the ability to gain funding, or you can misunderstand your financial health and place your business in jeopardy of closing. Understanding how your sales revenue is related to your gross profit is an important aspect of business accounting.
Sales revenue is the money you make from selling your product or service minus any returns that are credited back to a customer account. Also referred to as net sales or net revenue, sales revenue is a good indication of your projected income. Tracking these numbers tells you if your company is growing and meeting your expectations. However, if a product is not priced properly or there are other factors that do not translate your increased revenue into higher profits, look for trends indicating that it's time to implement a new business model.
Gross profit is your sales revenue minus the cost to make or buy your products (cost of goods sold). Eventually, you will subtract your operating expenses from your gross profit to realize the net income of your business. Therefore, your company's overall profitability is closely tied to the gross profit. You can project your income for the month by estimating your gross profit based on your current and anticipated sales. If your gross profit will not be high enough to cover standard operating expenses, then you must either market heavily or offer a special that increases your volume to make more sales revenue.
To compare monthly financial information of your business, calculate the gross profit ratio, or margin. This number tells you the percentage of how much of your sales revenue translates to gross profit. Your goal is to achieve as high a percent as possible. For example, if your sales revenue is $10,000 and your gross profit is $3,000, your ratio is 30 percent (3,000/10,000=.30). This indicates that 30 cents of every sales revenue dollar is gross profit for the company.