Net/Gross Profit, Sales, Turnover, Margins, ROI All EXPLAINED!

Hello & Welcome!

It’s 1st February today, congrats – we have moved passed the year’s darkest month and slowest sales period and can start looking forward to spring and summer!

Today I’m starting a weekly, 4 part blog post series covering the most common and important terminology used in the online selling world.

Today we’ll start with General Business terms and in the following weeks we’ll cover:

• Importing & Shipping
• eBay & Amazon
• eCommerce

So in total there will be 4 posts that should cover most of the terms you need to know about.

It may be geared towards people who are totally new to selling online but still – even experienced sellers sometimes mix up important stuff so it’s not a bad idea to go over the basics every now and then. And as we all know from Dragons’ Den – there is no bigger problem than not knowing your numbers, right?

So let’s get started with a list of the most common business terms that every entrepreneur should know about!

Sales/Revenue – amount of money you have received for the sale of goods. Example: if you sell an item for £10 and you sell 100 items, your sales would be £1000. Usually, when showing sales, you don’t take off ANY expenses associated with these sales. For example, this means that you wouldn’t take off PayPal fees from this number.

Turnover – basically the same thing as Sales but the term “Turnover” is usually used to show sales in a certain period of time. So if someone asks you what your turnover was for the last 12 months, you would give your total sales number for that period.

Gross profit – this is one of those numbers every Dragon is looking for! Gross profit means your Sales minus Cost of Goods. So for example, if you buy an item for £50 and sell it for £80, your gross profit is £30 (£80 – £50).

However you do not deduct any further expenses associated with sales, like taxes, salaries, rent etc. Only the cost of goods.

Net Profit – this is the REAL profit as we speak – money you make after ALL expenses are paid. This includes cost of goods, salaries, shipping costs, rent, utility bills etc. This essentially means the money you take home, after paying tax (if taxes are applicable).

Gross Margin – this is basically gross profit divided by sales/revenue, expressed as a percentage. To get this number you need to simply take Gross Profit and divide it by Sales and multiply by 100 to get it as a percentage.

For example: You buy an item for £50 and sell it for £80. Your Gross profit is £30 (£80 – £50). Then you take that £30 and divide it by £80 (total sales) and times by 100 to get your gross margin which is 37.5% (£30/£80 x 100 to get percentage).

Net Margin – similarly to gross margin, net margin is calculated by taking your NET profit and dividing it by sales/revenue, then multiplying by 100 to get it as a percentage.

For example: You buy an item for £50 and sell it for £80. Your other expenses for this sale are £10 (shipping, PayPal fees etc.). Your net profit on this sale is £20 (£80 – £50 – £10).

So you take that £20, divide it by £80 (revenue) and multiply the answer by 100 to get it as a percentage.

£20/£80 * 100 = 25%

So in this example, your NET margin on the sale is 25%.

Return on Investment (ROI) – this is the ratio of profit (or loses) made in a set period of time (month, quarter, year) in terms of the initial investment made, expressed as a percentage.

You get this number by simply dividing your net profit with the investment amount and then multiplying by 100.

For example: you have invested £1000 in products and after selling all your stock, you have made a £300 net profit. To get your ROI number you take your net profit (£300) and divide it by your investment (£1000) and multiply that by 100:

£300/£1000 * 100 = 30%

You have made a 30% ROI on this investment.

Balance Sheet – a term widely used in accounting and in the general business world. A balance sheet is a document/statement that shows all your assets, liabilities, capital, balance of income and expenses over a set period of time.

If you use accounting software, you can usually create a Balance Sheet with the click of a button. If you outsource your accounting, your accountant should be able to prepare this whenever you need – like in times when you need to take a business loan or just want to see the health of your business at any given time.

Cashflow – this is a term that is widely used but it’s not that easy to explain in simple words. Basically, cashflow is the amount of money that is being transferred in and out of a business. It’s a rather complex term and can be used in various scenarios but for small online traders, this is mostly used to manage the amount of cash you have in the bank, and to ensure you don’t run out of it.

You need to keep an eye on your cashflow at all times because otherwise you can run into a situation when you need to re-order goods but you have no cash available to do so.

Always have a reserve in cash you can operate with.

Many people make a mistake of going all in and not allocating any reserves, which can basically ruin your whole business.

Imagine this theoretical situation – you sell a product on eBay, you have great rankings and make a good profit on this item. Profit which you take out and use to buy new products all the time. Now, when you need to re-order that best-selling product, you don’t have any cash available to purchase it as you have already invested it into other different products.

This is a simplified example of course but I hope it shows how important cashflow is to your business. I will probably do a separate post about cashflow and how to manage it on my blog in the near future.

Accounts payable – this means all the money you (your company) owe to other companies/people (creditors). This could include:

• eBay fees
• Debt
• Stock
• etc.

Most small time traders won’t have a big issue with this as no one will give you stock on credit for example. But just so you know – the health of any company can only be checked by knowing exactly how much money you owe to others and how much money others owe to you.

Accounts Receivable – all the money that other companies/people (debtors) owe to you. Again, it’s not a big deal for small time online sellers as you won’t usually sell goods/services on credit terms.

Dividends – money that is being paid out annually to company shareholders, from profit. If you have a registered Ltd. company, you can’t simply take out profits whenever you want. It is done once in a year, after your annual return for Companies House is completed.

At that stage, you or your accountant will have calculated the amount of profit your company has made and therefore the amount of dividends you can pay yourself as a shareholder.

Inventory – in accounting terms this includes everything a business owns, such as stock, office equipment, packaging materials etc. But usually we use this term just to show how much STOCK you have.

This can be expressed as a number of units (for example – you have 100 widgets in stock) OR in monetary value – for example – you have bought each widget for £5, this means you have £500 tied up in inventory.

But in some specific situations (not accounting wise), you can also use the re-sale value of goods to show the potential value of the inventory you hold (how much you can sell it all for).

But in most cases, the cost price is used to express inventory as a monetary value.

Overheads – these are all ongoing business expenses that are not directly related to each sale you make.

This includes:

• Employee salaries
• Office supplies
• Rent
• Utility bills
• Cars/petrol
• Business licenses, software licenses
• Warehouse rent
• Etc

Usually these are fixed costs you know you have to pay each and every month.

When you’re just starting out you won’t have many such expenses, which is GOOD! The less fixed costs you have in the beginning, the better. Most people start out with very limited budgets and every penny they make in profit is crucial! Do not try to run before you walk. The longer you can operate from your house, with no employees and extra costs, the better it will be for your business growth and financial health.

And there you go – a list of the most important terms used in general business. I’m sure I have missed out some important ones so if you have any suggestions on what terms I should include in this list, please leave your ideas below this post, in the comments box.

Next Wednesday we’ll cover Importing & Shipping terms!

Best Regards,
Andrew