Business Studies – 5.5.1 Profitability | e-Consult
5.5.1 Profitability (1 questions)
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Gross Profit is the profit a business makes after deducting the cost of goods sold (COGS) from its revenue. It represents the profitability of the core business operations – essentially, how efficiently a business produces and sells its products or services.
Net Profit is the profit a business makes after deducting all expenses, including COGS, operating expenses (like salaries, rent, utilities), interest, and taxes, from its revenue. It represents the overall profitability of the business and how well it is managing its finances.
Understanding both is crucial for a business owner because:
- Gross Profit helps assess the efficiency of production and pricing. A low gross profit margin might indicate high production costs or pricing issues.
- Net Profit provides a comprehensive view of the business's financial health. It shows whether the business is generating a sustainable profit after covering all costs and obligations. A healthy net profit is essential for reinvestment, growth, and shareholder returns.
- Comparing gross and net profit highlights the impact of operating expenses and other costs on profitability.