Some of our most successful entrepreneurs never attended an accounting class, let alone graduated from college. Many entrepreneurs wouldn’t believe the point that skyrocketing revenues is an all-too-common quick recipe to kill a business. “What?!” you ask? It all boils down to gross profit, not revenues.
Gross Profit – Your One True Love
After calculating your company’s total revenues, gross profit is the next major thing you calculate. Let’s use an analogy that we all understand. You’re single, and you’re on the prowl for your one true love. You see a beautiful woman who catches your eye—her beauty is like your company’s revenues. And the first date is like gross profit. You can usually detect a potentially sour relationship on a first date, but not from a first look. So it is with businesses, a company’s gross profit, and especially its gross profit margin, can tell a lot about what’s under the hood.
Net Income, or the final take-home profits of a business, is essential, but there are a lot of time-consuming elements to consider in calculating profit. Gross profit has the advantage in being simpler to calculate.
The Entrepreneur.com staff wrote a very detailed explanation on how to calculate gross profit for a small business. This article clearly outlines the differences in variable and fixed costs, noting that Gross Profit is:
- Revenue – Cost of Goods Sold = Gross Profit
This is especially important when trying to decide which products to manufacture, and which ones to eventually drop. Surprisingly, many companies lose the habit of tracking these all-important metrics to their peril. Working with a contract CFO can help your company analyze these items on a regular basis.