What Is Gross Profit And How To Calculate The Gross Profit Sum
What is gross profit? Gross profit is the profit made from the total sales a company has made and then subtracting the costs of the products that have been sold. Such as a street food business that has sold 10 burgers at £5 each that equals to £50 minus the cost of the ingredients for the 10 burgers that equals £20 the gross profit is £30.
Gross profit can also be known as – Gross Margin – Sales Profit or Gross Income.
Once a business knows the gross profit it is making it can then be turned into a Gross Profit Percentage to find out if the product is profitable enough for the business to sell.
In this case, the Gross Profit Percentage will be 60% which needs to be changed to around 75% to become a profitable product. This can be done by raising the prices, using more affordable ingredients and reducing wastage.
Why Do Food Businesses Use A Gross Profit Target %
It is important for food businesses to use a GP% target to be able to work out if a product will be profitable enough to use on the menu. Within a catering business, there are many overheads and costs to consider. And these will be deducted from the monies that are taken.
Extra costs may include, staff wages, electricity, equipment, and insurance. A good GP% Target for a food business can be set at around 75%. A food business with a gross profit of 75% will be set on a good path.
What is Gross Profit Percentage – GP%
A gross profit percentage in a food business is the profit made on a menu item for example. As I mentioned previously a food business could be looking at a GP% of 75% this can be shown as:
A cost of a menu item is £2, this will be all the ingredients cost it takes to make the item. So to work out a 75% Gross Profit we need to calculate with a simple equation:
£2 x (4) = £8 – To get a Gross Profit off 75% we need to multiply the costs by 4.
This calculation can be used before an item is added to the menu. By knowing the product is profitable before we start selling it can set a food business up well.
Consider a street food business has had a very busy summer selling lots of menu items. However, the owners have not calculated the Gross Profit before the menu items were added to the menu.
In this case, the owners may at the end of the year calculate their year’s takings. They minus the food costs only to find a 60% Gross Profit has been made.
However, with a good gross profit target of 75% being set before the food business has started trading. And also the owners creating food items around this figure a much larger gross profit may be made.
A gross profit figure can be improved in ways such as reducing wastage, creating good relationships with suppliers and setting a correct selling price.
What is gross profit? – The gross profit is the most important figure to calculate, and items should be priced accordingly.
The main reason a catering business needs to set a good gross profit target and stick to it is that there are a lot of expenses. All the expenses will be taken away from the gross profit to result in the food businesses NET profit.
What Is Net Profit?
Once the gross profit has been calculated then the next job is to work out the net profit. This can be done by subtracting all of the costs from the gross profit number.
Net profit can also be known as the ‘bottom line’, net earnings or net income. And the net income will show how profitable a business is.