The gross profit rate tells a company how its production costs compare with the money that comes in from sales of the product. Also known as the gross margin or gross profit margin, the gross profit rate is one of many calculations used in determining the profitability and viability of a business. It is figured by subtracting the cost of goods sold from the net sales.
Net sales is the total sales amount that the customer paid for the sold merchandise, minus shipping costs and merchandise-related losses. The total sales amount is called gross sales. Losses that occur in merchandise need to be subtracted from gross sales to figure out net sales. Potential sales losses include returned merchandise, merchandise that was never received, or merchandise that was damaged upon receipt.
Also known as the cost of sales, the cost of goods sold includes the price paid to buy raw materials used to make the sold goods, plus the price of production to make the raw materials into finished goods. Cost of sales always includes production labor and may sometimes include overhead costs such as building and utility costs. Not all companies figure overhead costs into the cost of goods sold.
The net profit is the total profit the business made after deducting all expenses from the total profits made. Net profit can be either before or after the cost of taxes; companies usually specify which figure they use. Net profit can also be known as net income or net earnings, or if the profits end up in the negative, it can be known as net loss.
A measurement of the total profits taken in by a business before deducted expenses is called gross profit. Gross profit differs from net profit because gross profit includes only the final profit after production and does not take into account the costs of selling or marketing the product or the costs of running the company itself, including the pay for office and executive employees.
For individuals, gross profit rate denotes the total profit they have made minus any expenses the individual incurred to make the income. For instance, if a stay-at-home mom decided to make and sell handmade soap for a profit, her gross profit rate would be her soap sales minus the soapmaking costs. Soapmaking costs used to determine gross profit rate might include the material, time and equipment costs involved with making the soap, but deducted costs usually do not include the cost of the home in which the soap was made. For someone with a steady job, the gross profit rate would be his salary or pay rate minus the costs incurred in performing the job, including commuting costs and vehicle maintenance. When individuals incur expenses while making a profit, the expenses are often tax deductible.