PROFIT & Loss Questions Answered
What is Gross profit?
Gross profit is the profit that a business would make after the Cost of Sale, materials, Stock Sold, Variable costs or Direct Costs have been taken off. All these terms mean much the same thing. In other words you add up all your sales and then take away all you had to buy in terms of stock or materials to make those sales. What you are left with is the Gross profit.
What is the Gross Profit Margin?
This is calculated by dividing the gross profit by the selling price of your product, or service and multiplying by 100. This means that the GPM is expressed as a percentage of Sales.
For example if you bought something for £10 and sold it for £25 then the gross profit would be £15. By dividing this by the selling price (£25) and multiplying by 100 you will find that the GPM of your business is 60%.
This means that when you calculate your sales you the know that 60% of whatever you sell is Gross profit and can be used to pay the overheads.
How can I use GPM to calculate a Break Even Sales figure?
If you divide your total overheads (or running costs) for the year, by the GPM you will have worked out the Break Even Sales figure.
For Example: Imagine you have Overheads of &12,000 per year and a GPM of 60%, then dividing the 12,000 by 60% will tell you that your Break even Sales figure is £20,000. This means that if you sell £20,000 worth of product you need 40% (or £8,000) to pay for the product to sell and 60% (£12,000) to pay for the Overheads to run the business.
What is Net profit
This is the profit calculated by deducting all overheads (also known as running costs, fixed costs or indirect costs) from your gross profit and is the figure that Inland revenue need to calculate your tax liability for the year. see profit and loss section in the BDP for examples.