Profit: to advance and gain, derived from the Old French word prufiter meaning to benefit.

Profit may seem like a straightforward concept for your Small-Medium Enterprise (SME), after all it’s just profit. The moula from selling another book copy, leading a zumba class or running your tea side hustle. Just profit — or is it? What you might not know is that profit has a hidden message telling you if your SME is healthy as a horse or on it’s way to flatlining. There are three types of profit that can be thought of as the brain, heart and lungs of your SME, which are gross profit, operating profit, and net profit.

Each type of profit has its own nifty formula…

Gross Profit = [Total Sales Revenue] [Cost of Goods Sold (COGS)]

Operating Profit = [Total Sales Revenue] [Every expense except interest and taxes]

Net Profit = [Total Sales Revenue] [All Expenses]

On a fancy Income Statement, these types of profits will be visible with an amount beside it. Now that you know the different types of profits, how they’re calculated and where to find them on your financials, let’s talk about what each type of profit can tell us.

The Hidden Message

What can Gross Profit tell me?

  • Which of my product lines or services is the most profitable
  • Is my selling price for the product or service high enough to cover the cost to make the product or service
  • How efficient my company is at turning the resources used into my product or service

What can Operating Profit tell me?

  • Is my business profitable after including all necessary expenses to keep the business running (such as salaries, rent, insurance)
  • How profitable my business is before interest payments and taxes
  • The “real” performance of the company

What can Net Profit tell me?

  • What your company’s “bottom line” is — profitable or not
  • If you need to reduce your business’ expenses
  • If you need to increase your sales

The Rundown

By understanding the health of your SME through these three types of profit and their hidden messages, you can better your business model for success. According to Statistics Canada, only two-thirds of small businesses survive to see their fifth year of operations. At Chartd we help owners like yourself thrive, not just survive, by using our easy, online interface. Simply punch in a few numbers and understand the current and future financial outlook of your business. Play around with production and distribution costs, sales and expenses to improve your SME’s health – no matter the industry or your financial literacy. Whatever your business’ health, Chartd allows you to be in full control of its present and future.