When you look at the income statement of most businesses, what is the first category of profit you will see? It is gross profit:
Gross profit can be calculated easily for manufacturing and distribution companies because you can easily identify the costs of each good sold. But what about SaaS businesses?
As a service company, you sell your working hours: working hours of yourself and your employees spent providing services to clients. You can also include costs of subcontractors (external consultants) if you engage them, spent on providing services to clients. You can calculate gross profit on the basis of the following formula:
Please note that you should include only those hours spent on a certain client (billable hours). You should avoid including costs of hours spent on administration tasks, marketing activities etc. Therefore, you need a time tracking solution which will help you identify the percentage of working time each employee spent working for a client. Then, if one employee spent 60% of his/her time working for a client, than 60% of his/her salary costs should be included in the calculation of gross profit.
Then we will define Net operating profit or just Operating profit. When you subtract other operating expenses (costs of salaries of people related to non–billable hours, rental costs, costs of depreciation and amortization, etc.) from gross profit, you come to this category:
This is the profit you make from your business operations. However, this is not a profit you can take home as a dividend. You should also subtract financial expenses and corporate income tax to get to Net profit.
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