This series will take you behind some of the metrics you should be measuring in your business, including: profit, accounts payable and receivable, inventory and payroll. We’ll talk about what they are, what they really mean and more.
Profit is almost certainly something you care about in your business. But what exactly is it? Bottom-line, profit is when you have more revenue (sales) than expenses.
Cash flow and profit are not the same thing; it’s possible to have one, but not the other.
Three Types of Profit
There’s more than one kind of profit. Or rather, there is more than one way to measure profit. These three types include gross profit, operating profit and net profit, and all three are found on your income statement.
Revenue – Cost of Goods Sold = Gross Profit
Gross Profit – Operating Expenses = Operating Profit
Operating Profit ± Other Income & Expenses = Net Profit
Along with your profit, it’s important to consider your profit margin. These profitability ratios help show the financial health of your business. Profit margins can be looked at as a trend (this year compared to last year, this month compared to last month, etc.), or you can benchmark yourself against similar companies to gain a better understanding of how you compare to your peers. By monitoring your profit margins, you can see if what you’re doing is working or if you need improvement. Furthermore, it will help you forecast (budget) your future revenues and expenses.
There are two types of profit margins:
Profit and profit margins are among some of the most important metrics to track for your company. They give you a picture of where you’re currently at, what’s working and what’s not, and they can even show you where you could be headed in the future.
Accounting metrics are critical to your overall business strategy.