Profit, gross profit, net profit and operating profit

Lesson Details:

Video Transcription: In this video I'm gonna introduce you to a few basic accounting terms this video is brought to you by Appy Pie’s Academy like gross profit operating profit income and additional terms they're a little confusing but I'll do my best to make it very very clear now there's a term called cogs it's an acronym that stands for cost of goods sold essentially it means how much you spend making your product and it does not not include taxes you might have to pay that you all marketing costs operating costs to run the business any kind of one-time payments is just how much you spend making your products so keep that in mind we're gonna use it in a second and let's go over a few more finance terms so your gross profit which usually is what people refer to as just profit is revenue that you get minus the cost of goods sold so it's a basic calculation essentially if it cost you a dollar to make something and you sell it for five dollars then your gross profit is just four dollars you take your total sale price minus that manufacturer price and you keep the four dollars you're not counting taxes you're not counting your marketing costs you're not counting any of that right it's just whatever you sell for - how much it cost to make so this is the first basic calculation now let's talk about net profit we just talked about gross profit net profit is something different that's when you subtract more expenses like operating expenses interest taxes you might have to pay so that's in addition to cogs so it actually represents a more realistic picture of how your business is operating and obviously your net profit is a smaller profit than your gross profit because you're deducting more things the calculation to get your net profit is essentially getting your gross profit and then subtracting those additional expenses now there's another term operating profit sometimes refer to this acronym called EBIT earnings before interest and taxes and it counts the profit from a company's ongoing core business operations it does not include interest taxes or investment because those aren't very core to the business like if you made some profit and you put that profit into a bank and that bank or in some interest for you sure that's great it is a part of your business but that money isn't a part of the core business so the operating profit is useful for showing the health of the core business and to calculate it as essentially you take your operating revenue subtract cost of goods sold subtract expenses subtract any kind of interest or that you have anything like that and that gives you the actual real profit of your core business once you have that you got your profit what this gives you is a dollar amount now there's another way of looking at profit and that is your margin your margin is actually still your profit but it's looked at as a percentage and the percentage is useful to compare profitability of your company to companies in the same category to see which ones are run better if it's a private company you often don't know what your competitors margin is but it's very often used for publicly traded company because they have to disclose that but even if you have a company that's just getting started in some industry there is a known profit margin range for almost all industries and for your company you have to research what that is and eventually aim to be within the healthy range of your common profit margin and we'll talk a little bit more about profit margin coming up.