💰 Gross Profit Vs Net Profit

Gross Profit and net profit might sound like accounting jargon or accountenese! But these are two crucial key indicators to see how your business is performing. It’s the start of performing a business health check and you need to understand what they mean.

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This is not to be confused with your Total Sales or Turnover which are placed at the top of the table, Gross and Net profit are placed lower down showing different deductions.

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The industry tip today is to start to understand where Gross and Net sit and what areas apply to them in general terms but also a very important second concept - How does this appear when you price your individual jobs and then being able to check the profit was right after you finished?

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This is where Saint Accountants excels as Trade Only construction specialist compared to other Accountants who deal with Pubs and Hairdressers etc. Saint turns companies around all the time and this is one of the first powerful techniques we use.

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🤔 What Is Gross Profit?

Gross Profit is your sales price minus the cost of creating the sale i.e. the materials, labour, commission deducted, hire costs, delivery of materials, skips etc. This is very important from a company-wide view and also a job-per-job view. You need to be able to see if you are actually making money on the jobs you are carrying out.

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Working with Saint who are the UK's No 1 Trade-only Accountants and Bookkeepers, we can provide you with a very easy way of viewing this vital and important information that can transform your business through coding allowing you to enter your site and enter this data on your sales invoices, materials and labour invoices/expenses and very quickly you will be able to see your profitability on each site you are working on.

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If you have a high turnover of jobs then a specified software will come into its own here.

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🧮 How To Calculate Gross Profit?

The formula for Gross Profit is Sales minus Cost of Sales.

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For example, if your sales price for a tender was £20,000 and you have priced the job to be a gross profit of 45% this would mean the profit element is £9,000 and £11,000 is the Cost of Sales (say 60/40 split for materials and labour)

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£20,000 less your Materials of £6,600 less your Labour of £4,400 = £9,000 which is your Gross Profit

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The same figures can be used to convert this into a Gross Profit into a percentage.

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Gross Profit/Sales Price x 100 = %

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£9,000 / £20,000 X 100 = 45%

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🤩 What Is A Good Profit Margin?

In Construction, a good profit margin does depend on what kind of service you are providing however a typical average is 40%. If you’re hitting 25-30% you can start getting in cashflow difficulties and anything above 40% shows you are pricing, planning and completing your work efficiently and effectively. A good target to aim for is 50% if everything goes perfectly in the year.

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Using a software like Xero to track your income and expenses will allow you to give you a good idea of how your business is performing.

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🤔 What Is Net Profit?

Nett Profit is the selling price of your work less all the running costs of your business i.e materials, labour, insurance, software, accountancy, salaries etc

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Sales less Cost Of Sale less Overheads = Net Profit

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🧮 How Is Net Profit Calculated?

The Net Profit Calculation can be continued from your Gross Profit Calculation.

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Sales x

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Less Cost of Sales       (x)

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Gross Profit x

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Less Overheads        (x)

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Net Profit         x

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As an example:

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Sales of £20,000, materials of £6,600, labour of £4,400, insurance of £1000, software of £500, Accountancy of £1250, Salary of £2,000.

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This would give £20,000 - £6,600 - £4,400 - £1,000 - £500 - £1250 - £2,000 = £4,250 Net Profit

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In the same way as Gross Profit, we can show Net Profit as a percentage as well.

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Net Profit / Sales x 100 = %

£4,250 / £20,000 x 100 = 21.25%

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🤩 What Is A Good Net Profit Margin?

For a Construction business, if you are hitting a 15-20% net profit margin then this is a good target to be achieved. A 10-15% net profit margin is typically what is achieved especially with bad debts… If you are hitting a 5% net profit margin then you could be running into cashflow difficulties if current processes and procedures are not reviewed.

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👍 What Does Profit Say About Your Business?

When you are running your business, your primary goal is to make money.  An easy way to measure the success of your construction activities is to look at your profit levels. This is one of the ways you can track the financial health of your business.

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Looking at the gross and net profit of the business will allow you to see whether you are overspending in your labour/materials or your net profit will show you whether you are overspending in your overheads.

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🕊 Cash Vs Profit

This is a very common question as people often blur the two together!

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"If I have made 250,000 profit, why don't I have 250,000 cash?"

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The profit element of your business shows purely the operating activities of the business i.e. income from sales, labour, materials, rent, salaries, insurance and so on. Activities that are not included within your profit element are taxes (VAT, CIS, PAYE, Corporation Tax), Loans, motor vehicles, Plant and Equipment, and Directors Loan Accounts are just some examples that are not impacted by the profit and loss.

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These additional cash movements are what needs to be measured on your cashflow forecast to see how your business is truly performing from a cash perspective. A good report to look at is Statement of Cashflow, this will show you if your business is making money from your operations and external investments on one report.

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🎉 That's a wrap!

I hope you found this useful! If you would like to go over anything we discussed within this article, please let me know by simply getting in touch here.

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Let Saint Trade Only Accountants help you and take the strain off you managing all of this - You are good at what you do because you do it every day and they are good at saving you time and money because that's what they do every day. Switch to a Saint Trade Accountants today and it could unlock growth and be the one thing that was holding you back.

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Join today and enjoy a totally different experience with your accountant.