Gross profit Vs net profit

What I believe: One of the easiest ways to lose money in business is to mistake gross profit for net profit.

Many businesses think they're making money while they're just consistently handling cash. The mistake is from assuming gross profit is net profit.

Here is the distinction:

Gross profit tells you whether the product itself makes money. Net profit tells you whether the business actually makes money.

Gross profit is (selling price of your product) - (direct cost of making that product). You calculate that to know if the product is good enough to invest time into making. People often know this.

Net profit is rarely calculated by small businesses. It is (All the money you make from the business) - (All expenses of the business).

Example: Let's use a shawarma business.

Assume you sell 1 shawarma for ₦1,0000.

Direct cost of making 1 shawarma = Bread: ₦120 + Chicken: ₦300 + Sausage: ₦80 + Cabbage and carrots: ₦70 + Shawarma cream and ketchup: ₦100 + Seasoning and small extras: ₦30 + Foil / packaging: ₦50

Total direct cost per shawarma : ₦750

Gross profit = (Selling price: ₦1,000) - (Direct cost: ₦750)

Gross profit = ₦250

That means:

A shawarma business gross profit is ₦250 per shawarma in this example.

Now add the other business costs

Let us spread the daily running costs across each shawarma sold.

Assume for that day: Gas: ₦3,000 +Transport: ₦2,000 + Helper wages: ₦5,000 + Electricity / charging / misc: ₦2,000 + Spoilage / waste: ₦3,000

Total daily overhead: ₦15,000

Now assume you sell 100 shawarmas that day.

So overhead cost per shawarma is: ₦15,000 ÷ 100 = ₦150 per shawarma

We now calculate the net profit:

(Gross profit per shawarma: ₦250) - (Other business costs per shawarma: ₦150)

Net profit = ₦100

That means:

A shawarma business net profit is ₦100 per shawarma in this example. It's how much the business actually makes per shawarma.

P.s. It's not complex math, I promise. If you did not understand, you just have to read again. Slowly.