More on the Bottom Line

The other day we talked about the value of saving a dollar in expenses.  We pointed out that an additional dollar of sales only drives pennies to the bottom line where a dollar of expenses saved, drives a dollar to the bottom line.

Here’s another way to make a big difference in what you take home (or reinvest) at the end of the day.  A single point increase in your average gross profit can increase your after tax profits by ten, fifteen, or even twenty percent!

How can that be?  How can one single point of gross profit translate into such a big increase in net profit?  The best way to explain is to give an example.  For the sake of simplicity (the concept, not the vacuum cleaners or the sewing machines), we’ll use round numbers.

Let’s say you now do $100,000 in sales at an average gross profit of 40% and your net, after tax profit is 8%.  Here’s how that would look:

Sales $100,000
Gross Profit (40%)    40,000
Expenses and Taxes    32,000
Net Profit      8,000

Now, let’s increase gross profit just one point to 41%.  Here’s how that looks with everything else being the same:

Sales $100,000
Gross Profit (41%)    41,000
Expenses and Taxes    32,000
Net Profit      9,000

 

That’s an increase of $1,000 or 12.5% in net, bottom line profit.  Put it another way, like expense reductions, an increase in gross profit, unless it’s offset by an added expense, goes right to the bottom line. 

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