The most effective and efficient approach to making more money starts with projecting the next twelve months for Net Sales, Gross Profit, Operating, and Net Income. Start with these four underlying results from your P&L Statement since these numbers matter most to your business.

Net Sales reflects how well you utilize your capital, capacity, and other resources to generate the top line of your business, which funds everything else in your business.  Below is how Net Sales is calculated:

Net Sales = Gross Sales – Sales Tax – Sales Discounts – Sales Returns – Bad Debt

Gross Profit measures your first level of profit contribution that comes from transforming a dollar of sales into a profit. The most efficient way to increase Gross Profit is to hold your direct costs while increasing your selling price. Gross profit is calculated as follows:

Gross Profit = Net Sales – Cost of Goods Sold (COGS)

Operating Income is the second level of business profit. It’s the second most important number from your P&L Statement, which measures what it costs you to support your operations out of every dollar of Gross Profit earned. The formula for Operating Income is the following:

Operating Income = Gross Profit – Selling, General, and Administrative Expense (SG&A)

Net Income also called Net Profit is the third level of profitability is the hardest number to impact given its high reliance on the results of sales and operations reflected in Gross Profit and business admin that shapes Operating Income.  Below is how Net Income is calculated:

Net Income = Operating Income + Other Income – Other Expenses – Owner’s Compensation – Interest – Taxes – Depreciation – Amortization

While every number on your P&L Statement impacts the business profit equation, don’t be distracted by all of the line items your accountant can report for you on your P&L Statement.

You either have a plan for earning profits or you don’t. Without a plan to direct and control your business, “How will you know if you’re earning enough to be worthy of your valuable time and investment?”

In the long run, your ability to make money is driven by how much you collect in sales, less your direct costs to produce what you sold and the indirect costs incurred to support your business.  These are the numbers making up Net Sales, Gross Profit, Operating, and ultimately Net Income.  The “Big 4” is what makes the difference between you making or losing money.

When recognizing what to do to improve business results becomes overwhelming, you don’t want to face the day ahead, step back and focus on the “Big 4.”  Looking at how your profits cascade from Net Sales is how you best recognize what needs to change.  Click here to have a certified BusinessCPR™ Business Scientist review your P&L Statement to show you the patterns and trends in your business that you can take action to build on and where changes are needed to make more money.