STUDENT CORNER - 242

Gross and Net profit

We saw in our last session what is gross profit; that is, the money left with you after deducting the cost of the total manufacturing process from the total revenue of the sale of the products.

Of course, this step of arriving at Gross profit is important because without knowing the gross profit, you cannot arrive at the exact net profit; both gross and net profit are inter-dependent. Both kinds of profit have their own benefits to the trade.

 Gross profit indicates the company is earning profit; it means over-all commercial activities are effective; in other words, the company has acquired a place in the market; it has customers to its products.  Net profit tells you how efficient you are in the business; that is, it helps you assess your performance, thereby reveals to you the scope of improvement. If you improve performance of the company, it will reflect in the increase of the gross profit as it is said year-on-year basis.

Improving the performance of the company must be the aim of all the departments of the company; in fact, it must be the sole aim of the employees of the company, from the last employee of the company to the owner of the company.  You might have heard that the Vision and Mission of the company must penetrate down to all the employees and it must proceed from the President of the company.

 It is pointed out by the Management experts that the spirit of the company must be pervasive through the whole team of the company. The inventory manager must see to it that the inventory is commensurate with the immediate need and foreseeable future demand; capital must not be allowed to get stuck in the inventory; too much inventory cuts into the capital and too little inventory faces the risk of shortage of necessary materials at the very time of the need; both kinds bring ultimately loss to the company. The production manager must be in constant touch with the Marketing personnel so that he is all the time aware of the demand, now and near future; the Purchase personnel must be instructed that they must search out the cheapest supplier but at the same time quality of the materials must not be sacrificed for the sake of the price. This is just to show that the spirit of efficiency is present in all the departments of the company.

And communication is all-important factor in a sustained business enterprise, communication both upwards and downwards must be maintained. In fact, inter-departmental communication is actually the life-line of an efficient organization. For instance, let us assume the Inventory manager is rather lacking in communication; it will sooner or later, often sooner, affect the performance of the company. Purchase department, if it does not get the details of requirement, it will impact negatively on the production which in turn will damage the supply-chain; that is, the customer of the company will not get what he wants in time in the right quantity. If such instances are repeated, the customer will shift to some other company. A loss of a customer is an expression of, among other things, inefficient organization.

We will move on to Net Profit in our next.