A company’s revenue, minus the business’ costs of goods
If I sold 5000 cheese sandwiches for £1 each my total revenue would be 50 x £1 = £5000 It costs 25p per sandwich to purchase bread, butter and cheese. My gross profit = Revenue – Costs of sales (25p x 5000= £1250.00) = £3750.00
The business’ gross profit minus expenses
My gross profit from my sandwiches is £3750.00 to calculate my Net profit I need to minus the rest of my expenses • £385 on rent
• £80 on advertising
• £950 on staff salaries
My total expenses are £1,415
My net profit= Gross profit (£3,750) – Expenses (1,415) = £2,335
The difference between gross and net profit
The difference between gross and net profit is that gross profit is merely a stepping stone to work out the net profit. Say at the end of a month a business has £5000 in the bank, we need to work out the gross profit to know exactly how much we have to pay to the manufacturer and to cover the costs of materials. The same goes for net profit. Say after the business had worked out the gross profit and we had £4250 left in the bank, we still wouldn’t know exactly how much money we had made that month until we had worked out the net profit.
Cost of sales
Cost of sales is the cost of the materials used to produce a product. This includes any costs included in making the product, this includes: • Shipping costs
• Cost of containers
• Overhead costs linked directly to the manufacture, like rent for the manufacturing facilities Costs vary dependant on the industry. For example a retail business buys products to resell them at a higher price, but a manufacturer either buys raw materials and turn them into finished products, or buy parts and just assemble them, ready for sale.
Expenses are all the costs that a business or organization has to pay out, this includes • Fixed costs
• Variable cost