Understanding Gross Profit, Net Profit And Costs

By David Bullock

The terms “gross profit,” “net profit” and “cost” are some of the most commonly misunderstood business terms. Too many times we hear about great and wonderful achievements of revenue generation, usually in one of these forms:

* $1,000,000 in 24 hours

* $10,000 a Week

* $1,000 a Day

There is no indication if these are gross revenue numbers, net revenue numbers or profit reports.

Perhaps you are saying to yourself “Wait a minute…you mean there is a difference?”

Yes, there is a BIG difference with the reporting of earnings. The number that is most often reported is gross revenue, which is the total amount of money that was taken in for a transaction. This can be a huge number, until we go beneath the surface to see what it really means.

When we look closely, we start finding costs - those expenses that any business owner has to incur to be in business. Some common examples of costs are:

* Marketing

* Advertising

* Commissions

* Time

* Travel

* Equipment

* Labor

* Materials

Too many times, new business owners are shocked to know how much money it costs to produce one transaction. Let me say that another way:

It costs money to earn money.

One of the major reasons that businesses fail is because of poor capitalization from startup. If you are opening up a business, do it the smart way.

Keep your expenses low. Why buy the building, furniture and equipment before you have the first contract and the first set of sales closed?

Let the marketplace fund your business and your growth. There is no guarantee that your new idea, new product or service will take the market by storm.

Ask yourself:

* Is my product selling?

* Can it be sold?

* Can I sell it?

* Who is buying?

* Are they buying often enough?

Stop buying inventory in hopes that it is going to fly off of the shelves and that “the product will sell itself.” Before the product can sell itself, it has to be promoted, sold and delivered.

Why I am telling you this? Well, just let me say that behind every successful business are several mistakes and business ideas that just didn’t make it.

Keep your mistakes and failures to a minimum, and you’ll be that much closer to achieving your business goals .

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