ESYB2 053 - How to Calculate Gross Profit Net Profit and the Bottom Line
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[00:00:00] In this video, I'm going to introduce you to a few basic accounting terms like gross profit, operating profit, income, and additional terms. They're a little confusing, but I'll do my best to make it very, very clear. Now, there's a term called COGS. It's an acronym. It stands for cost of goods sold. It means how much you spend making your product.

And it does not include taxes you might have to pay, debt you owe, marketing costs, operating costs to run the business, any kind of one time payments. It's just How much you spend making your product. So keep that in mind. We're going to use it in a second And let's go over a few more finance terms. So your gross profit is Revenue minus the cost of goods sold.

So it's a basic calculation Essentially if it costs you a dollar to make something and you sell it for five dollars, then your gross profit [00:01:00] It's just 4. You take your total sale price minus that manufacturer price and you keep the 4. You're not counting taxes, you're not counting your marketing costs, you're not counting any of that, right?

It's just whatever you sell for minus how much it costs to make. So this is the first basic calculation. Now let's talk about net profit. Net profit, that's when you subtract more expenses. Like, operating expenses, interest, taxes you might have to pay, that's in addition to COGS. So it actually represents a more realistic picture of how your business is operating.

And obviously your net profit is a smaller profit than your gross profit. Because you're deducting more things. The calculation to get your net profit is essentially Get in your gross profit and then subtracting those additional expenses. Now, there's another term, operating profit. Sometimes referred to [00:02:00] this acronym called EBIT earnings before interest and taxes.

And it counts the profit from a company's ongoing core business operations. So the operating profit is the profit that you have left after you Subtract additional things like the rent you pay, the marketing cost you incur, inventory that you have to pay for, payroll, equipment, insurance, R&amp; D, that's research and development, any software licensing fee.

Those are all the expenses that you have to incur to run your business. And you calculate the operating profit after you've subtracted all those things. Including cogs. So your operating profit will be smaller, but it will give you a sense of how well run your business currently is and whether you're incurring too many costs for the revenue you're generating.

or [00:03:00] whether you're on the right track in terms of overall profitability. It does not include interest taxes or investment because those aren't very core to the business. Like if you made some profit and you put that profit into a bank and that bank earned some interest for you, sure, that's great. It is a part of your business, but that money isn't a part of the core business.

So the operating profit is useful for showing the health of the core business. And to calculate it is essentially, you take your operating revenue, subtract cost of goods sold, subtract expenses, subtract any kind of or that you have anything like that. And that gives you the actual real profit of your core business.

What this gives you is a dollar amount. Now there's another way of looking at profit, and that is your margin. Your margin is actually still your profit, but it's [00:04:00] looked at as a percentage. And the percentage is useful to compare profitability of your company to companies in the same category to see which ones are run better.

If it's a private company, you often don't know what your competitors margin is, but it's very often used for. Publicly traded company because they have to disclose that, but even if you have a company that's just getting started in some industry, there is a known profit margin range for almost all industries and for your company, you'd have to research what that is and eventually aim to be within the healthy range all of your common profit margin and we'll talk a little bit more about profit margin coming up.

