Questions

What does Marcus Lemonis means in the article below?

"your expenses as a percentage of your gross profit — "not a percentage of your sales. You pay your bills with gross profit — not with revenue."

3answers

[This is a duplicate of the question at https://clarity.fm/questions/4300]

Since some new business owners get excited about revenue, instead of gross profit, it is always wise to show the difference.

Let us consider as an example, that your business makes $10,000 (revenue) in revenue in one month, and has a cost of goods (or services rendered) of $7,000. This means that you have to pay someone (e.g. a vendor) $7,000 to make $10,000.

Then, you are faced with general expenses for the month that amount to $2,000 (utilities, etc.).

The excerpts that you quoted from the article mean that you should NOT think that you are spending $2,000 from the $10,000 (revenue), but that you are spending $2,000 from the $3,000 (gross profit: $10,000 - $7,000).

As you can imagine, you will be much more cautious when you realize that you are spending 66% of your gross profit on expenses, and not simply 20% of your revenue.

While this is certainly common sense, the reason for his pointing it out is that sometimes people do not keep it in mind.


Answered 6 years ago

It seems that he's using the following definitions:

1) [Sales Revenue] - [Cost of the Goods Sold] = [Gross Profit]

2) [Sales Revenue] - [Cost of Goods Sold] - [Expenses] = [Net Profit]

So then do
[Expenses] / [Gross Profit] = ["Your expenses as a percentage of gross profit"]

This % allows you to get a better idea of how much you could increase your [Net Profit] by reducing [Expenses] (e.g. by making advertising, rent, salaries, etc. more efficient)


Answered 6 years ago

Gross (Income) is raw money before taxes.

Net (Profit) == Income - Expenses.

I ignore income, as it's fairly meaningless.

Profit, what you have in your hand after you pay your expenses, is real money.

Using the term Gross Profit likely means Pre-Tax Profit.

In other words, after paying your expenses you have Gross Profit. After paying Taxes, you have Net Profit.

I treat Taxes as a hard expense, as you must pay or end up in Club Fed or more likely having your assets attached, like liens on your property.

This writer you mention could likely clarify his terms a bit more.


Answered 5 years ago

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