The end of the month has passed, and you’re staring at your company’s financial statements and wondering, what do all these numbers mean today. Let’s dive into two key ratios that can provide you with some valuable insight into the health of your company: Gross and Net Profit.

Gross Profit: The Heartbeat of Your Business

 Gross Profit = Net Sales – Cost of Goods Sold

Think of Gross Profit as the heartbeat of your business. It’s the difference between what you sell your products or services for and what it costs you to produce them. In other words, it’s your sales revenue minus the cost of goods sold (COGS). This ratio tells you how efficiently your company is producing its goods and generating revenue.

Net Profit: The Bottom Line

Net Profit = Gross Profit – Operating Expenses & Costs

Net Profit is the bottom line, literally. It’s what remains after all your expenses have been deducted from your total revenue. This includes operating expenses, taxes, interest, and any other costs. Net Profit is a true measure of your company’s profitability.

Comparing Ratios: The Bigger Picture

When we work with our clients on these numbers, we don’t just stop at the calculations. We compare these ratios to various other metrics to get a better understanding of what’s going on within the company’s finances. Here are a few ways we make these comparisons:

• Prior Periods and Years: We look at how these ratios have changed over time. Are we performing better or worse than last year? Is this month an improvement over the previous one?
• Seasonal Comparisons: For some clients, it’s more relevant to compare season over season or quarter over quarter, especially in industries with “peaks and valleys.”
• Industry Standards: We also compare these ratios to industry standards and what we know about our competitors. Are we leading the pack or lagging behind?

Conclusion

By analyzing these ratios and comparisons, we can provide our clients with actionable insights and strategies to improve their financial health. So, the next time you’re staring at your financial statements, remember: those numbers are telling a story. It’s up to you to listen and understand what they’re saying.

Want to learn about how you can analyze your financial ratios? Take a look at this blog we wrote!

Note: The information above is provided for discussion and learning purposes. To receive guidance about your specific tax needs and business financials, please speak to your accountant  who understands your specific circumstances.

May you be empowered;

To learn more about specific tips and tricks for your company, contact Shanalisa!

Shanalisa Keller is a CPA, CGA and Coactive Trained Coach who founded and leads the team at Canadian Finance Gal. She has a desire to make personal and business finances less daunting and confusing. ⁣⁣She loves accounting and tax and wears the respective geek label with pride. When Shanalisa is not counting beans you can find her mixing a fun new cocktail or building a tasty charcuterie board.⁣⁣ You can read her other blogs on various small business topics here,  book a chat or coffee or wine with her here, or you can find her on LinkedIn (her favourite social platform).