Notes

How do you calculate gross and net pay?


Gross profit assesses a company's power to earn a gain while simultaneously managing its production and labor costs. Consequently, it's a significant metric in determining why a company's profits are increasing or decreasing by looking at sales, production costs, labor costs, and productivity. If a company reports a rise in revenue, but it's more than offset by an increase in production costs, such as for example labor, the gross profit will soon be lower for that period.

As an example, in case a company hired too little production workers for the busy season, it would lead to more overtime purchase its existing workers. The effect could be higher labor costs and an erosion of gross profitability. However, using gross profit being an overall profitability metric will be incomplete as it doesn't include all of the other costs involved in running a successful business.

On another hand, bruto naar netto loon net income represents the benefit from all aspects of a company's business operations. As a result, net income is more inclusive than gross profit and provides insight in to the management team's effectiveness.

Like, a company might increase its gross profit while simultaneously mishandling its debt by borrowing too much. The excess interest expense for servicing the debt could result in a lowering of net income despite the company's successful sales and production efforts.

Limitations of Gross Profit and Net Income
Gross profit may have its limitations since it generally does not apply to any or all companies and industries. For example, a services company wouldn't likely have production costs nor costs of goods sold. Although net income is the most complete measurement of a company's profit, it too has limitations and could be misleading. For example, if your company sold a building, the amount of money from the sale of the asset would increase net income for that period. Investors looking only at net income might misinterpret the company's profitability as an increase in the sale of its goods and services.

Operating Profit, Gross Profit, and Net Income
It's important to see that gross profit and net income are only two of the profitability metrics available to determine how well a business is performing. For example, operating profit is really a company's profit before interest and taxes are deducted, which is why it's known as EBIT or earnings before interest and taxes. However, when calculating operating profit, the company's operating expenses are subtracted from gross profit. Operating expenses include overhead costs, such as the salaries from the corporate office. Like gross profit, operating profit measures profitability by going for a slice or part of a company's income statement, while net income includes all aspects of the income statement.
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