Tuesday, August 19, 2008

Gross Profit vs. Net Profit: A Common Mistake

One of the most common mistakes that I see small business owners make when discussing profit is failing to accurately differentiate "gross profit" from "net profit."

Gross profit is equal to your revenue minus your cost of goods sold (or cost of sales).

Net profit is equal to your revenue minus ALL expenses.

Turn to Virgin founder and Chairman Richard Branson for a simple mnemonic to help you remember the difference, "Pretend you're fishing. Net is all the fish in your net at the end of the year. Gross is that plus everything that got away." This is the advice that was given to him by one of his Virgin boardmembers after he consistently made this mistake early on in his career...he considers it the best financial advice he ever received.


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