Gross Profit (simple question)
Discussion
Okay, so GP is nett sales minus cost of sales less payroll and taxation, right?
So my taxi company - GP is sales minus what, exactly?
Fuel?
Vehicle HP?
Repairs and maintenance?
Permits and licences?
Telephony?
But not drivers wages (they are all PAYE hourly rate)?
Have I missed anything? Just having a bit of a brain won't engage gear today.
So my taxi company - GP is sales minus what, exactly?
Fuel?
Vehicle HP?
Repairs and maintenance?
Permits and licences?
Telephony?
But not drivers wages (they are all PAYE hourly rate)?
Have I missed anything? Just having a bit of a brain won't engage gear today.
It really depends on what you're trying to achieve.
Ask any decent accountant what 2 + 2 is and the reply will be "what would you like it to be"
Generally, GP is earnings minus the variable costs, however how you allocate fixed and variable costs is open to considerable interpretation.
I suspect that hasn't clarified much and I'll leave it to the accountants to properly confuse things
Ask any decent accountant what 2 + 2 is and the reply will be "what would you like it to be"
Generally, GP is earnings minus the variable costs, however how you allocate fixed and variable costs is open to considerable interpretation.
I suspect that hasn't clarified much and I'll leave it to the accountants to properly confuse things
ok the first accountant's take on it.
What goes into the GP calc depends on the industry you are in. In this circumstance from the company's point of view and if the company owns the cars I would suggest you would deduct fuel and drivers' salaries to calculate GP. You would then deduct the other costs to calculate net profit.
What goes into the GP calc depends on the industry you are in. In this circumstance from the company's point of view and if the company owns the cars I would suggest you would deduct fuel and drivers' salaries to calculate GP. You would then deduct the other costs to calculate net profit.
Gross Profit is the profit left over when you deduct your Direct Costs from your Sales. "Direct Costs" are the costs you HAVE to incure to generate the basic income of the business. So , if your business is selling widgets, the purchase costs of those widgets is a "Direct Cost". If you need staff to carry out work on the Widgets before they are sold, those Staff Costs are also looked on as a Direct Cost. Other Direct Costs would be ancillary costs incurred in preparing the product or service for onward sale.
"Indirect Costs" are usually referred to as "Business Overheads" and they tend to be fixed and not directly related to the Sales. Examples of these would be Rental Costs or Administration Staff Wages.
There is an element of flexibility allowed in interpreting how much (if any) of the "Overheads" might be atributed to Direct Costs. For example, some businesses might want to apportion some of the Rental Costs or the Light Heat and Power costs between "Direct" and "Indirect" costs.
Whatever policy a business adopts in treating its costs, it should stick to it a for a reasonable length of time as "consistency" is one of the sacrosanct tennets of accounting.
When the Overheads are deducted from the Gross Profit you are left with the Net Profit. If the business is responsible for its own tax liability (e.g. a limited company), the taxation arising is calculated on the Net Profit (subject to some adjustments required for tax purposes) and deducted from the Net Profit.
What is left over is sometimes referred to as "Distributable Profits. These profits can be distributed to the shareholders in the form of Dividends. Alternatively, they could be retained in the company and carried forward to the company's reserves for future use (such as acquisitions of new assets - or even the acquisition of other busineses).
So, in short, a Profit and Loss account looks something like this -
Sales - less Direct Costs = Gross Profit
Gross Profit - less Overheads = Net Profit
Net Profit - less Taxation = Distributable Profits
Distributable Profits can be distributed to the business owners or taken in whole or in part to the Profit and Loss reserve account.
"Indirect Costs" are usually referred to as "Business Overheads" and they tend to be fixed and not directly related to the Sales. Examples of these would be Rental Costs or Administration Staff Wages.
There is an element of flexibility allowed in interpreting how much (if any) of the "Overheads" might be atributed to Direct Costs. For example, some businesses might want to apportion some of the Rental Costs or the Light Heat and Power costs between "Direct" and "Indirect" costs.
Whatever policy a business adopts in treating its costs, it should stick to it a for a reasonable length of time as "consistency" is one of the sacrosanct tennets of accounting.
When the Overheads are deducted from the Gross Profit you are left with the Net Profit. If the business is responsible for its own tax liability (e.g. a limited company), the taxation arising is calculated on the Net Profit (subject to some adjustments required for tax purposes) and deducted from the Net Profit.
What is left over is sometimes referred to as "Distributable Profits. These profits can be distributed to the shareholders in the form of Dividends. Alternatively, they could be retained in the company and carried forward to the company's reserves for future use (such as acquisitions of new assets - or even the acquisition of other busineses).
So, in short, a Profit and Loss account looks something like this -
Sales - less Direct Costs = Gross Profit
Gross Profit - less Overheads = Net Profit
Net Profit - less Taxation = Distributable Profits
Distributable Profits can be distributed to the business owners or taken in whole or in part to the Profit and Loss reserve account.
Edited by Eric Mc on Sunday 29th March 16:30
Yes it does, because it allows performance over time to be gauged and comparison with business in the same sector.
Certain nusinesses have "ball park" GP expectations and these GP% are used by HMRC to determine if the figures they are seeing in submitted accounts are within the expected ranges and therefore believable.
Obviously, there are limits to what can be gleaned from any standard business ratios but they do have their role in business analysis.
Certain nusinesses have "ball park" GP expectations and these GP% are used by HMRC to determine if the figures they are seeing in submitted accounts are within the expected ranges and therefore believable.
Obviously, there are limits to what can be gleaned from any standard business ratios but they do have their role in business analysis.
To massively oversimplify (car financing for example should probably be explained by your accountant)
Imagine two days, one where you get no business, and another day when you're busy.
The costs you incur on the "no business" days, are overheads. You have to pay them no matter what. Electricity bills, admin staff salaries, business rates, phone rental, car tax..
The extra costs that you have to pay on the busy day are what you deduct from sales to get gross profit. Commissions to drivers, for example.
Imagine two days, one where you get no business, and another day when you're busy.
The costs you incur on the "no business" days, are overheads. You have to pay them no matter what. Electricity bills, admin staff salaries, business rates, phone rental, car tax..
The extra costs that you have to pay on the busy day are what you deduct from sales to get gross profit. Commissions to drivers, for example.
Edited by john_p on Monday 30th March 14:23
Tyre Smoke said:
Taxi company so service industry.
I would put all the costs of running the taxis into Direct Costs - ie vehicle tax, maintenance, HP interest charges, licence fees and driver's wages.Premises costs - such as rent, light and heat etc I'd show as Overheads.
General admin costs such as your own salary (if a director of a ltd co) or office staff I would also place into overheads.
Telephone charges, stationery, genertal office costs, advertising etc tend to be shown as Overheads too.
Finally, legal and professional fees - as well as your accountancy and book-keeping fees I would also show in Overheads.
Gassing Station | Business | Top of Page | What's New | My Stuff