It’s year-end and time to review how you did. Gross Profit Margin and Net Profit Margin are two numbers you want to look at – they help you with both reviewing your numbers and planning for the upcoming year.
When you look at your Profit and Loss, notice there’s a section for Income, then Cost of Goods Sold (COGS) and Expenses. Just after the COGS section you’ll see a subtotal called Gross Profit. Gross Profit Margin is what you have after selling your product or service. You can setup QuickBooks so you can see this number at a glance – and I highly recommend you do so, if you haven’t already.
While many think COGS is just for retailers and those in e-commerce, service providers can use Cost of Goods Sold, too. If you had to spend that money to make that sale (often considered Direct Expenses), then I would move those expenses to Cost of Goods Sold. For instance, to landscape someone’s backyard or remodel a home, you had to buy materials for the job, pay your crews, perhaps subcontractors and more – all very specific to that job. That’s different than overhead, which would be the expenses you have whether or not you have a customer; examples would be office supplies, phone bill, internet access, rent, etc. Moving job-related expenses to the COGS section on your Profit and Loss will make it really clear how much profit you have after your jobs (aka Gross Profit) and you will quickly see if you have enough to cover overhead and still have a profit.
QuickBooks makes also makes it easy to see your Gross Profit as a percentage which is really helpful in both monitoring and planning. Considering that you probably have numbers that fluctuate, which is the case for many businesses, being able to keep up with a percentage can simplify estimating and reviewing your number. Simply click to customize the P & L report, then check % of Income on the Display tab.
Once you have your direct expenses moved to the Cost of Goods section and turn on the percentages in your P & L report, you will also be able to what percent of your income (not gross profit) your expenses are; you can also see your bottom line expressed as a percentage – aka Net Profit Margin.
For planning purposes, you may want to look at your P & L by month with the percentages turned on so you can easily see your good and not so good months. Then you’ll have a better idea of what you need for this upcoming year to have a decent profit – which is, after all, the name of the game!
If you need help with this, you can contact our office or your accountant.
So here’s to a very profitable 2016!