How Can Your Lovely, Hard Earned Profits Be Gross?
Are you more confused and frustrated than you’ve been all year?
Ah yes, well, no doubt you’ve just had that annual meeting with your accountant.
Here’s the “financial reporting-challenged” business person’s mini-guide to understanding profit and loss.
Repeat after me…’In-come State-ment’
An income statement is a financial statement that reports a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating activities and non-operating items, as in dividend income, profits and losses from investments, gains or losses incurred due to foreign exchange, and asset write-downs.
It also shows the net profit or loss incurred over a specific accounting period.
Okay, let’s try this one – Pro-fit-a-bil-ity Ra-tios
Gross Profit is determined by taking the amount of your NET Sales minus the Cost of Goods Sold.
(Net Sales is defined as Total Sales minus Returns, Sales Allowances and Discounts)
If the Gross Profit is a positive number, you’ve made a profit before taking into account your marketing and administration expenses.
Now your Gross -Profit -Margin is defined as your Gross Profit divided by your Net Sales, or, in other words, your Total Revenue. In general, the higher your gross profit margin is, the more efficient your business.
This number is very important and should be monitored regularly to ensure your business is on track.
This ratio explains how much money you have left over to cover marketing and administrative expenses ... you know important stuff like wages, debt obligations, government taxes, and shoes.
You may also want to calculate your pro-fit mar-gin.
Your Profit Margin is your Net Income divided by Net Sales (or Total Revenue)
Again, generally speaking, the higher this number, the better.
if your profit margin is falling consistently over numerous periods, look to see if your business has fallen in sales as well, or is it perhaps showing increased “cost of goods” expenses? (relates to gross profit margin). Other reasons could be higher general expenses (relates to profit margin) that now need to be passed onto customers or maybe even theft.
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