How to Calculate Gross Profit, Definition, and Benefits

By | March 9, 2022

For people who are new to the business world, knowledge of finance is very important. Generally, the financial failure of new ventures is due to incompetence in analyzing the components of profit. Profit itself has net profit and gross profit. Business people must know how to calculate gross profit and the factors that influence it.

What often happens, usually novice business people only pay attention to net profit, and put aside gross profit. Especially if all the income is mixed without separating where the gross profit and net profit.

How to Calculate Gross Profit, Definition, and Benefits
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Definition of Gross Profit

Before moving on to a discussion about how to calculate gross profit, let’s first know about the meaning of gross profit. What is meant by gross profit in general is income or income obtained by the company from sales without deducting costs.

That is why gross profit cannot be said to be profit because there is still an element of cost there as a deduction from revenue. There are production costs, overhead, employee salaries, interest payments and also taxes.

A specific definition of gross profit is sales minus HPP or net sales after deducting HPP. Net sales itself is the result of sales less production costs or costs of making services in service businesses, but salaries, taxes, and interest have not been included in these sales.

The difference with net income is in the deducting component. In gross profit or gross profit, operational costs are not included there, but only production costs. Meanwhile, to get a net profit, all costs including production costs must be calculated and then used as a deduction from income.

How to calculate gross profit is one of the basic knowledge about finance that must be owned by business actors. If not, then the numbers on the financial statements could be a mess. Not to mention if this gross profit is not placed in the right post. The company’s cash flow becomes blurred and the company can lose money.

Often new entrepreneurs, especially small and home-based businesses, still mix accounts. Namely personal accounts and business accounts. So, it can not be seen clearly gross profit and net profit as well as operating income. Not to mention the potential for the use of working capital due to these mixed accounts.

How to Calculate Gross Profit

After knowing what gross profit is, it is hoped that there will be no more mix-ups between revenue and production costs. Knowledge of how to calculate gross profit is important so that business owners can distinguish between net sales and production costs added.

The following are the steps for calculating gross profit:

1. Calculate Income

Calculating income is certainly very easy because the money that comes in from sales is income. Be it the sale of merchandise or service products. The money that comes in from the sale is what will be used to calculate gross profit.

2. Calculate HPP

HPP is often also referred to as COGS or cost of goods sold, where the explanation is any production costs incurred or imposed on each unit of product sold. The components that make up the COGS are beginning merchandise inventory, ending merchandise inventory, and net purchases.

The calculation of COGS is obtained from the inventory of ready-to-sell goods minus the ending inventory. The calculation of the inventory of goods ready for sale is obtained from the cost of production plus the beginning inventory. When the HPP calculation has been obtained, the gross profit will be easy to calculate.

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3. Formula for Calculating Gross Profit

The calculation of gross profit is obtained from the following formula:

Revenue – COGS

If simulated is as follows:

In the profit and loss statement of PT Semerbak Wangi, the following information is obtained:

  • Net income : IDR 100,000,000
  • HPP : IDR 10,000,000
  • Marketing Fee : IDR 10,000,000
  • Administration Fee : IDR 10,000,000
  • Tax : Rp.10. 000000

So, the gross profit of PT Semerbak Wangi is: IDR 100,000,000 – IDR 40,000,000 = IDR 60,000,000

PT Semerbak Wangi’s gross profit is taken from the calculation of net income minus HPP. Meanwhile, other costs are not included in the income deduction component because they will only seek gross profit. Other cost components will be included in the calculation when looking for net profit or net profit.

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4. Gross Profit Margin

After knowing how much gross profit is, it is also necessary to calculate this gross profit margin. Gross profit margin or gross profit margin is the ratio of gross profit to total revenue expressed as a percentage.

The calculation is as follows:

Sales – COGS x 100%

Sale

If you use the example above, you will get the following calculation:

IDR 100,000,000 – IDR 40,000,000 x 100% = 60%

IDR 100,000,000

So, the gross profit margin in the example above is 60%, which means that the company is in good condition.

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The Importance of Calculating Gross Profit

From the explanation above, many may wonder why gross profit should be calculated if it does not reflect the actual profit. As it turns out, there are several reasons why calculating gross profit is important.

Check out the following list:

1. Measuring the Effectiveness of a Business Unit/Company

As explained above that fixed costs such as employee salaries, advertising, insurance, office supplies, and also costs that do not directly impact on production must be paid. No matter what the level of output, these fixed costs must be paid.

Gross profit calculation can be used to assess how efficient a business or company is when it comes to using its inventory and workforce. A company that runs a deficit of course has a component in the workforce whose work is inefficient. Companies can immediately change the style of work or evaluate the workforce.

2. Knowing the Condition of a Business Field/Company

The calculation of gross profit can also be used to determine whether a business sector or company has a surplus or a deficit. If the gross profit calculation is positive, then the business can be said to be profitable. On the other hand, if the calculation results are negative, then of course the business is experiencing a deficit.

From this gross profit calculation, the line of business or company can evaluate. When experiencing profit, the company must maintain and increase it until it reaches optimal profit. However, if the company is in deficit, of course there must be changes or evaluations from the sales and working side.

3. Knowing the Stability of the Business/Company

The calculation of gross profit margin has also been mentioned above. From the calculation of the gross profit margin, the company can see the position of a line of business or company among its competitors. The state of a business/company is said to be stable if its gross profit margin is high.

A high gross profit margin indicates that the cost of goods sold has been successfully suppressed by the business owner/company. Therefore, the owner of the business/company can book a gross profit that is in line with the target and even exceeds the set target. However, if the gross profit margin is low, then the business owner/company is not efficient in allocating the cost of goods sold. As a result, profits are small and have the potential to lose.

That was the discussion about how to calculate gross profit. Knowledge of this is one way that must be done by business actors so that their business can make a profit. It is also important to separate personal and business accounts so that the cash flow and profit and loss of a business unit/company can be seen clearly. Continue to add knowledge about financial reports so that the financial condition of the business can be clearer.

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Hopefully this short article can be useful for all of you, especially for business people.

Author by : Bang izal.

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