can anyone explain what oint #3 means in the article below:
Regardless of the size of your company, every business owner needs to know three numbers, Lemonis says:
1. Your annual sales revenue, "based on a trailing 12 months, not the calendar."
2. Your gross profit margins.
3. And 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."
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.
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)
Well, revenues are the return that you have from your investment. If for example, you have a flat and you rent it you are going to have the monthly payment as a revenue. But you have to pay, let say the common expenses. the garbage recollection or the repair of the refrigerator. Then you are going to have the gross profit A.K.A "income before taxes"
Then you have to pay your food, your electricity bill, etc , this is not to be invested in your property but in your personal comsuption, are are "expenses".
