What does the gross profit include?

A

Akira

Guest
Hello,

I'm looking for business to buy ( restaurant or cafeteria) and often they write "gross profit XX%"

The ting confusing me is: is the gorss profit normaly the profit left after all the expences and costs for runing the business, just before taxes (corporation or sole trader)? In this case we sustract taxes from the gross profit and the result is the net profit.

Or it is simly the difference between the price paid for buy the goods and the price you sell it? In this case "the gross profit" is only the ratio/margin.

I find it's a quiet confusing way to advertise the business to sell.
It's a huge difference when you mean 68% gross profit on buing/selling a slice of bacon, and 68% gross profit at the end of the year all expences paid (rent, wages, bills etc) and only one ting to pay is your taxes..

Has someone an idea what must mean the "gross profit" when you buy one business? Thanks
 
Hi Akira

People define things quite differently, so I wouldn't rely on them. Look at the entire figures and then define them as you wish.

I would have thought that the gross profit would mean the sales less the cost of sales.

From that you would take the salaries, rent and other overheads, which would give you net profit before interest charges and taxation.

Brendan
 
Gross profit is sales less cost of sales. Sales are self explanatory while cost of sales is the cost that is directly attributable to the sales. Thing of it this way, if I was to stop selling tomorrow morning, what expenses would I no longer incur. Purchases, wages, electricity?, heating, telephone?, etc, etc. Administration expenses such as Insurance, rates, accountancy, electricity?, telephone?, bank charges, bank interest, would still be incurred no matter if you cease selling or not, therefore these cannot form part of your GP calculation as they are not a cost of sale.

However, saying all that and as Brendan has already eluded to, some people including accountants do not always apply the strict accountancy rules in calculating the GP. So beware and always ask what does GP include?

Patrick
 
Thanks very much for your explanation, guys, I think the best way I can do is take an accountant to check the figures.
Best regards
 
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