Today I'm joined by Dave of Small Business Services, who is an expert in all things business finance, book keeping and systems
Cashflow, gross profit and net profit are three related and often misunderstood concepts that can determine whether a business is successful or not and whether cash is available to keep the business going and growing.
Cashflow is one of the most important metrics in business. It is crucial to know how much cash you have flowing in and out of your business in order to know if your business is profitable or not. This is the first in a series of blogs that will look into the different metrics in business. This blog will start with cashflow, gross profit and net profit.
Dave explains: "Cash flow is like the blood that runs through your veins, in your heart. It keeps the business alive. For a business to operate with cash at hand is vital to its survival, mainly from capital investments from the owners of the business in order to create purchasing, which creates revenue streams."
Gross profit is the amount of money remaining after accounting for costs related to production, distribution and marketing. It's one of the most important factors when you're trying to understand whether or not your business will be profitable. If your company can't make a sufficient number of units of a product for less than what the units are sold for, then it'll never be profitable no matter how many sales you make.
Dave goes onto say: "Gross profit is the margin you make goods or services, you sell over and above your cost price to sell them. So Gross Profit in a commodity business is really really important because you need to manage not only your top line.
So if you want to increase your sales, you need to increase your inventory.
Otherwise you can’t increase your sales. It's not possible. One doesn't go without the other.
So if you don't have the pies to sell, you're not gonna make the money on the pies.
So in order to increase your pie sales, you need to increase your inventory when you increase your inventory."
Love the pie analogy
Net profit is what remains of gross earnings after all deductions are subtracted. Gross profits are generally broken up into the cost of doing business, rent, allowances for staff salaries, taxes or other necessary expenses that contribute to overhead items that are only incurred in the manufacturing process. Subtracting these costs from sales revenue will result in a net profit figure that will often be reduced once share savings and owner salaries have been allocated
Dave explains: "Net profit is what you've got left out of gross profit after you've paid your people you paid your overhead your rents, your admin, your insurances or your licenses and registrations. Whatever you need to do to operate the business. It's not directly related to the inventory is the difference between Gross Profit and or your admin costs. Then then you have a net profit left over. "