Honestly, establishing gross profit to measure how well your business is doing can seem overwhelming. And that’s especially true for owners of small and medium businesses who seldom have enough time available to come to grips with the details.

Most business owners tend to focus on turnover, pushing sales and closely monitoring sales figures. But that means they are focusing on the wrong thing. Turnover is not an indicator of the success of any business. It is merely the net sales generated by your business. Gross profit, more importantly, is an indicator of how much revenue your sales are bringing into your business. There’s a big difference!

So what is gross profit?

Simply put, GP is the balance of income left over after the deduction of costs associated with the sale of goods or services. The calculation formula of Gross Profit = Turnover – Cost of Sales” seems quite straightforward, but as your business grows your cost of sales, in particular, can become very complicated if it’s not managed properly. Over time, calculating gross profit becomes more complex.

What constitutes cost of sales?

When calculating gross profit, you are looking to assess the efficiency of your business at using labor, supplies and third-party expenses, which are referred to as variable costs. Variable costs fluctuate with the level of output and can include but is not limited to:

  • Cost of product
  • Direct labor costs
  • Commissions
  • Equipment and Materials
  • Marketing
  • Logistics costs
  • Credit card fees
  • And more…

Many business owners overlook hidden costs like shipping/delivery and card payment fees because they can become hidden in the sales process, but they have a significant impact on your gross profit. The cost of sales relates directly to any type of expense incurred directly to produce an item or service that you sell to your customers.

It’s quite easy now to see how the cost of sales can become complicated, but the best way to ensure that no expenses are left unaccounted for is to have an integrated business efficiency tool managing your workflow from start to end.

Utilizing business management tools via SaaS platforms is the way of the future for many reasons, but most importantly because you don’t have to fork out huge amounts of cash upfront for pricey equipment and software. By implementing a business efficiency tool, like StreamBean360, you will have access to your gross profit and turnover figures in real time.

Results at your fingertips are vital

Gone are the days where knowing what your gross profit was based on historical figures within a specific time frame like financial year end or mid-year. Now you can know what your gross profit is as you are doing business. And that’s really important because it allows you to adjust margins right away if necessary, and also gives you room to maneuver when pitching for new business or planning marketing campaigns.

As the business world gets faster and faster, and customers expect immediate results if they are going to continue supporting you, it’s vital that your business keeps pace. Business owners who want to continue relying on historical data are going to lose out, and every unsuccessful quote you put out is another successful sale for a competitor. Implement an integrated Quote-to-Cash system to bring visibility to your organisation and to help you make better decisions.