Gross profit vs net profit: what is left at each step
Gross profit tells you whether what you sell makes money. Net profit tells you whether the business does. A company can be healthy on the first and losing money on the second.
The difference in one sentence
Gross profit is revenue minus the direct cost of the goods or services you sold; net profit is what is left after every other expense — rent, salaries, marketing, interest and tax — has also been paid.
The formulas
Gross profit = Revenue − Cost of goods sold
Cost of goods sold (COGS) is only what it cost to make or buy what you sold: stock, materials, direct labour on the job.
Operating profit = Gross profit − Operating expenses
Operating expenses are the costs of running the business whatever you sell: rent, salaries, software, marketing.
Net profit = Operating profit − Interest − Tax
Some businesses also have one-off income or costs that sit between operating and net profit.
Margin = Profit ÷ Revenue × 100
The same division gives gross margin, operating margin or net margin, depending on which profit you divide.
One month, carried all the way down
- Revenue
- 50,000
- Cost of goods sold
- −30,000
- Gross profit (40% margin)
- 20,000
- Rent
- −6,000
- Salaries
- −8,000
- Marketing and software
- −1,500
- Operating profit (9% margin)
- 4,500
- Interest on a loan
- −300
- Tax (illustrative)
- −420
- Net profit (7.56% margin)
- 3,780
The figures are an example, and the tax line is a placeholder rather than any country's rate. The point is the shape: a 40% gross margin became a 7.56% net margin.
Which one to use, and when
| Gross profit | Net profit | |
|---|---|---|
| Answers | Do my products or services make money on their own? | Does the business make money overall? |
| Use it to | Set prices, compare products, decide what to stop selling | Judge the year, plan hiring, decide on borrowing |
| Moves when | Prices, suppliers or discounts change | Anything changes — including rent and headcount |
| Watch out for | Leaving direct costs out of COGS, which flatters it | One-off costs that make a single month look worse than the trend |
Mistakes that distort the numbers
- Putting shipping, packaging or payment fees in operating expenses when they are part of the cost of each sale. Gross margin then looks better than it is.
- Comparing a gross margin with a competitor's net margin.
- Reading a single month with a large one-off cost — an annual licence, say — as the trend.
- Treating revenue that includes VAT as income: VAT collected belongs to the tax authority. See how to calculate VAT to take it out.
Working it out in BuzPulse
The Profit Calculator takes revenue and cost for a period and returns the gross profit, the gross margin and the share of revenue going to cost — with the formula shown under each result. It works without an account and stores nothing.
It does not take operating expenses, interest or tax, so net profit is the subtraction in the example above. For a single product's price, use the Profit Margin Calculator instead — and see profit margin vs markup before setting a price from a percentage.
Frequently asked questions
- Is gross profit the same as revenue?
- No. Revenue is everything you invoiced. Gross profit is revenue minus the direct cost of what you sold.
- Can gross profit be positive and net profit negative?
- Yes, and it is common in a young business: products sell above their cost, but rent and salaries are larger than the gross profit those sales produce.
- Are salaries part of cost of goods sold?
- Only the labour that goes directly into what you sell — a technician's hours on a job, for example. Office and management salaries are operating expenses.
- What is a good net profit margin?
- It depends heavily on the industry, so compare with businesses like yours rather than with a general rule. Track your own figure month to month first.
The tools behind this
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About the author
Naeem Ahmed builds and runs BuzPulse. These guides describe tools he has built, and they describe how those tools actually behave — including where they stop.
Corrections and questions: nsglobal6@gmail.com
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