1. What is gross profit?
Gross profit is an indicator that shows the amount of profit that a business earns after deducting direct costs related to the production and sale of products and services. In other words, this is the profit before taking into account other costs such as sales costs, business management costs, taxes, etc.
Gross profit is just an indicator of a company's business performance.
2. Distinguish between gross profit and net profit and other profits
The most common types of profit are gross profit, net profit, profit before and after tax. However, many people often confuse these types of profit. Therefore, Viindoo has created a comparison table of profit types to help you easily distinguish.
| Gross profit |
Net profit |
Profit before tax | Profit after tax |
| Is the remaining profit after taking net revenue minus production costs, raw materials... |
Is the remaining amount after taking gross profit minus selling and business management expenses. |
Is the remaining profit after taking the total revenue and other income minus all types of operating expenses of the business. | Is the remaining profit after deducting operating expenses and corporate income tax. |
3. Meaning of gross profit
Gross profit plays a very important role in evaluating the business performance of an enterprise. This index shows the profitability of an enterprise from the production and trading of goods and services. Below are some specific meanings of gross profit:
- Helps businesses evaluate the effectiveness of the production and trading process of goods and services.
- For small retailers, financial management is often difficult due to the lack of professional support systems and tools. However, careful and meticulous recording of expenses plays an extremely important role in ensuring business efficiency and making wise decisions.
- Businesses with high gross profits and good cost control will become attractive to investors, helping businesses attract capital to expand their operations.
- A business with a higher gross profit than its competitors shows a competitive advantage, better profitability and greater growth potential.
Gross profit plays a key role in the success and expansion of a business.4. Formula for calculating gross profit
Calculating gross profit accurately helps businesses evaluate operating efficiency, make appropriate investment decisions and attract investors. The formula for calculating gross profit is as follows:
Gross profit = Net revenue - Cost of goods sold
In there:
- Net revenue: Total sales revenue minus deductions such as discounts, returned goods, etc.
- Cost of goods sold: Is the total direct costs related to the production and sale of products/services, including raw material costs, direct labor costs, loss costs,...
5. How to optimize gross profit
Enterprises with high gross profits often show the ability to effectively manage costs, use capital reasonably and generate good profits from production and business activities. However, not all enterprises achieve high gross profits. Therefore, optimizing gross profits is an important goal that enterprises need to aim for in order to improve efficiency and promote sustainable development. Here are some ways to optimize gross profits that you can refer to and apply:
Increase sales revenue:
- Promote products/services to more potential customers through online and offline channels such as social networks, websites, advertising, PR...
- Provide attentive customer service, resolve complaints quickly, create a good shopping experience to retain old customers and attract new customers.
- Market research to meet increasingly diverse customer needs, launch new highly competitive products/services.
- Expand your market to new geographic areas, participate in fairs and exhibitions to promote your products/services and find potential customers.
Decrease in cost of goods sold:
- Using advanced technology, automating production, applying lean management methods to minimize waste and improve production efficiency.
- Negotiate prices with suppliers, buy in bulk for better prices, compare prices from different suppliers.
- Closely monitor production costs, cut unnecessary costs such as loss costs, transportation costs, etc.
Effective cost management:
- Create a detailed cost table, classify costs by item, monitor and supervise closely to ensure reasonable cost use.
- Apply professional financial management software to help track and manage costs more effectively, automate payment processes, and report detailed costs.
Improve management capacity:
- Improve employees' skills and knowledge in sales, production, and management to increase work efficiency and minimize errors.
- Apply advanced management systems such as ISO, ERP to control product quality, optimize production processes, and effectively manage finances.
Analyze and monitor performance:
- Monitor and evaluate gross profit margin periodically to evaluate the business performance of each department, product/service.
- Monitor market trends, raw material prices, and customer behavior to adjust business strategies appropriately and promptly respond to market changes.
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