Gross profit is one of the most often overlooked and underused areas of the income statement. Yet, gross profit and its partner gross profit margin are essential components of the most important decision that a small business owner will ever make: how to price a job.
It sounds like a clear-cut exercise. To set a price on a job, you calculate the costs to deliver a service or provide a product. Once the costs are forecasted, you then build in a profit to determine a price to your customer. However, when job costing, many business owners don’t price strategically, keeping a gross profit margin target in mind.
You’ll see that’s the secret to profitability: setting and using a gross profit target to be able to cover all of your business’s expenses.
Know the Difference: Gross Profit vs. Net Profit
The first step towards understanding and improving profitability is to know the difference between gross profit and net profit.
Gross profit is the profit after cost of goods sold is subtracted from net income (often called sales revenue). In other words, your sales on a specific job minus your direct expenses associated with that job will be your gross profit on that job. Direct expenses include direct labor and direct materials.
Whereas, net profit is