STUDENT CORNER - 242
Gross and Net profit
We saw in our last session what is gross profit; that is, the money left
with you after deducting the cost of the total manufacturing process from the
total revenue of the sale of the products.
Of course, this step of arriving at Gross profit is important because
without knowing the gross profit, you cannot arrive at the exact net profit;
both gross and net profit are inter-dependent. Both kinds of profit have their
own benefits to the trade.
 Gross profit indicates the
company is earning profit; it means over-all commercial activities are
effective; in other words, the company has acquired a place in the market; it
has customers to its products. Net
profit tells you how efficient you are in the business; that is, it helps you
assess your performance, thereby reveals to you the scope of improvement. If
you improve performance of the company, it will reflect in the increase of the
gross profit as it is said year-on-year basis.
Improving the performance of the company must be the aim of all the
departments of the company; in fact, it must be the sole aim of the employees
of the company, from the last employee of the company to the owner of the
company. You might have heard that the
Vision and Mission of the company must penetrate down to all the employees and
it must proceed from the President of the company.
 It is pointed out by the
Management experts that the spirit of the company must be pervasive through the
whole team of the company. The inventory manager must see to it that the
inventory is commensurate with the immediate need and foreseeable future demand;
capital must not be allowed to get stuck in the inventory; too much inventory
cuts into the capital and too little inventory faces the risk of shortage of
necessary materials at the very time of the need; both kinds bring ultimately
loss to the company. The production manager must be in constant touch with the
Marketing personnel so that he is all the time aware of the demand, now and
near future; the Purchase personnel must be instructed that they must search
out the cheapest supplier but at the same time quality of the materials must
not be sacrificed for the sake of the price. This is just to show that the
spirit of efficiency is present in all the departments of the company.
And communication is all-important factor in a sustained business
enterprise, communication both upwards and downwards must be maintained. In
fact, inter-departmental communication is actually the life-line of an
efficient organization. For instance, let us assume the Inventory manager is
rather lacking in communication; it will sooner or later, often sooner, affect
the performance of the company. Purchase department, if it does not get the
details of requirement, it will impact negatively on the production which in
turn will damage the supply-chain; that is, the customer of the company will
not get what he wants in time in the right quantity. If such instances are
repeated, the customer will shift to some other company. A loss of a customer
is an expression of, among other things, inefficient organization.
We will move on to Net Profit in our next.Â
