**A:**
The difference among the three ways of expressing profit involves
different categories of expenses. Gross profit is net sales minus
the costs of goods sold. Operating profit is gross margin minus
selling and administrative expenses (all expenses except income
tax). Net profit is operating profit minus any additional expenses
and taxes.

By examining
these numbers on your business statements, you will get a true
picture of your company's performance. For instance, you might
learn that in spite of strong revenues and what seems like a
positive cash flow, what you thought was a profitable business is
really showing a net loss due to high overhead expenses.

The three
ways of expressing profit can each be used to construct what are
known as profitability ratios. This is done by dividing each item by
net sales and multiplying by 100 to create a percentage, which also
can be expressed as a ratio.

Expressing
the numbers this way makes it easy to compare your company's
financial results at different time periods. It also allows you to
compare your results with those of other companies and with industry
benchmark ratios.

For
instance, if your gross profit margin (gross profit divided by net
sales multiplied by 100) is lower than the average for your
industry, or has declined from last quarter, it may mean your markup
is too low or you are paying too much for your merchandise.

Examining
your net profit margin (net profit divided by net sales multiplied
by 100) can help you decide among other things - if you can
increase or should decrease the size of draw you're taking from
your fledgling small business.