Why Calculate Gross Profit?

Filed Under (Accountancy Term of the Day) by moirapottow on 30-01-2009

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 Gross Profit -The Gross Profit is the amount of money you have left over after you have paid your suppliers for stock that you purchased for resale purposes or paid for the consultants time to deliver consulting services to a client. This is your Profit before deduction of expenses or overhead costs. 

Why do we Calculate Profit?

  • To determine amount of money left over to pay other operational expenses
  • Provides an indication of the effectiveness of your pricing policy
  • Provides an indication of your purchase and production controls

Gross Profit = Sales-Cost of Sales

 

How can knowing this information assist in your business?

  • Calculating the Cost Of Goods Sold and Gross Profit allows you to monitor your sales and the stock in the business and compare the figures to the previous month  or the same period the previous year.By counting and monitoring your stock regularly, you will soon get a feel if things “don’t add up” and can investigate any potential problems areas.This could point to a shrinkage problem. Shrinkage is Theft or wastage and if the GP Margin  is too low, you can put systems in place to monitor stock more closely and try and reduce shrinkage.
  • If the outcome achieved is not the desired one, you must review such activities as:
       -were all Sales put through the business
       -was stock counted correctly
       -are you calculating value of stock on hand using correct  prices: i.e. what you paid for the goods; and
       -is your pricing correct

Cost Of Sales

Filed Under (Accountancy Term of the Day) by moirapottow on 30-01-2009

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Cost Of Sales/Goods Sold – cost of sales refers to the amount of money you paid to obtain or create the product/service you are going to sell to your customers or clients.

The Cost of Sales May Include:

  • The cost of the stock you purchase for resale
  • The labour costs you incur to produce your product or service
  • Equipment and machine hire or running costs
  • Other Production Costs

Cost Of Sales = Opening Stock-Closing Stock + Purchases