Updated: Aug 4
The financial performance of your company must be calculated in order to determine how profitable it is to run. Gross profit and net profit are two important variables that any business owner should understand. Also, managing and expanding your organization depends on your ability to comprehend operating costs and cost of goods sold (COGS).
In this article, I will define and give you formulas for key financial metrics. Specifically, I’ll cover Operating Expense, COGS, Gross Profit, Net Profit, and more.
The difference between sales revenue and the cost of products sold is known as gross profit. This is the amount of money your company makes after subtracting the direct costs associated with manufacturing or acquiring the goods you sell.
Gross Profit Formula
Revenue - Cost of Goods Sold = Gross Profit
The entire revenue your company generates after all costs, such as operational expenditures, cost of goods sold, and taxes, have been subtracted is known as net profit. Net Profit is your bottom line and ultimately determines the financial health of your company. It is the clearest indicator of profitability.
Net Profit Formula
Gross Profit - Operating Expenses – Taxes = Net Profit
The expenses incurred by your business to run it, such as rent, utilities, salaries, and advertising charges are your operating expenses. You can total up all of the costs associated with running your firm over a predetermined time frame, such a month or a year, to determine operational expenses. These expenses should be fixed and you will incur them regardless of how much product or service you sell.
Operating Expense Formula
Operating Expense = Salaries + Sales Commissions + Promotional & Advertising Cost + Rental Expense + Utilities
Cost of Goods Sold (COGS)
The direct cost of manufacturing or acquiring the goods you sell is known as COGS. The price of labor, raw materials, and production overhead are all included. You can use the following formula to determine COGS:
Starting Inventory - Ending Inventory - Purchases Made During the Period = COGS
In some cases, you are selling a service or intellectual property like software for which there is no inventory. So COGS can also be an expense that is directly used to deliver or sell a product/service. Expenses such as license fees, royalties, freight charges, or anything else that is directly tied to the sale can be COGS.
Your company’s value and efficiency depend on your ability to understand your financial performance. You can make sensible decisions and take action to raise your bottom line by keeping key financial metrics. Take control of your company's finances!