The Gross Profit: Definitions and How to Calculate it!

Gross profit is one of the most important things for business owners to understand. There are many terms that business owners need to understand to run well. By learning these terms, business owners can run their businesses well.

Moreover, terms that are relevant to the business. These terms are important to learn because they are closely related to business. One of the important terms to know is gross profit. By studying gross profit, you can get many things to help you run a business.

 

Gross Profit

Previously, you must first understand what gross profit is. As you know, profit is the profit you get. However, what about gross profit? Is the gross profit a profit directly obtained by the business owner?

Gross profit is something different from net profit. If net profit is the profit that is obtained after calculating the various expenses incurred by the company for these business activities, gross profit is a different profit compared to it.

Gross profit itself is the profit that a company gets when the profit earned has been deducted from the costs incurred for selling the product or service. So you can say that gross profit is not a net profit obtained by a company.

However, getting your gross profit is arguably a good first step. This indicates that your business can make a profit even though it is still only in terms of sales. So that it can be said that gross profit is the profit obtained from sales activities only.

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The Advantage of Knowing Gross Profit

Gross profit itself is not only important to know to help calculate finances. There are several benefits that a business owner can get by knowing. The following are some of the advantage of knowing the gross profit for a business.

1. Helps Determine the Cost of Goods Sold
   The cost of Goods Sold is an important part of a business. Knowing the gross profit will also help you determine the cost of goods sold for the products you have. This can show whether the cost of goods sold that you are using is too low or even too high.
2. Determine the Ideal Selling Price
   In addition to the cost of goods sold, knowing the gross profit that is owned will also help in determining the ideal selling price for the product. From the visible profit, you can see whether sales are good enough or even below expectations. This can also be influenced by selling prices that are not ideal.
    
3. Evaluation Material
   In addition, knowing the gross profit can also be useful for businesses in other ways. For marketing, for example, the profit can show whether the sale is going well or not. Moreover, gross profit is profit derived from sales alone, so the activities of the marketing team are quite influential on these sales and can be used as evaluation material.

 

Factors Affecting Gross Profit

Gross profit itself is not without being influenced by other factors. Three factors influence it. The following are some of the influential factors in question.

1. Product Selling Price
   The selling price of the product certainly affects the gross profit. The bigger or smaller the selling price of the product will certainly affect the size of the profit earned. However, the selling price of the product can also determine whether sales can increase or not. Therefore, the ideal selling price is quite important.
    
2. The Number of goods
   Just like the selling price, the number of items sold also affects the visible profit. The more items sold, the better. However, this requires the production of goods that are not small. Too many items being produced but not sold can also harm sales.
    
3. Cost of Goods Sold
   The cost of goods sold also affects gross profit. This is because the selling price of a product is also determined by the cost of goods sold. The meager margin between the two makes little profit.
   Therefore, it is important to determine the right selling price. Regardless of the margin generated, the selling price must be higher than the cost of goods sold to generate gross profit.

 

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Gross Profit Formula

Just like other calculations in business, you need a formula to help you determine the results of the calculation. The following is a formula that you can use to get gross profit for your business

Gross Profit = Product Sales - Cost of Goods Sold in Products

Only these two components are needed by a business in calculating gross profit. Let's study the case if it is implemented into an example

In a period of 1 year, PT Milana has succeeded in selling its products amounting to 500 million Rupiah. However, PT Milana has employee and operational salary expenses of 140 million Rupiah.

Marketing expenses during this period also spent around 80 million Rupiah. Meanwhile, the basic selling price of PT Milana in 1 year requires around 100 million Rupiah. How much was PT Milana's gross profit in that period?

Referring to the formula explained earlier, you only need 2 components to calculate gross profit. The two components are the amount of sales and the cost of goods sold required. Therefore, it can be concluded that the results are as follows:

Gross Profit = Sales – COGS

Gross Profit = 500,000,000 – 100,000,000

Gross Profit = 400,000,000

It's also quite easy to remember the formula because only two components are used. In contrast to net profit which requires other components such as salary expenses, rent expenses, and so on.

Those are brief explanations about gross profit and the formula you need to use. Apart from that, you also have to remember the factors that affect gross profit as mentioned. This will help you in several ways as previously mentioned.

Apart from financial and sales activities, you should also not forget the service aspect of doing business. You can use data analytics to help you process business data. In addition, there are customer care and broadcasts to help customers. For more information, visit Kokatto!