Gross Profit vs Net Profit Explained: Differences and Examples

what are the differences between gross profit and net profit

If you’re new to the world of profit, the terms “gross profit” and “net profit” can be confusing. However, understanding the difference between the two is crucial for any business owner or investor. In this blog, we will explain the difference between gross profit and net profit and explore the importance of each.

What is gross profit?

Gross profit is the revenue a company generates minus the cost of goods sold (COGS). COGS includes the direct costs of producing a product or service, such as materials and labor. Gross profit reflects the profitability of a company’s core business activities, excluding other expenses such as rent, utilities, and salaries.

What is included in gross profit?

Gross profit includes the direct costs of producing a product or service. For example, if a company sells t-shirts, the cost of the t-shirts, the materials used to make them, and the labor to produce them would be included in COGS. However, indirect costs such as marketing and administrative expenses would not be included.

How to calculate gross profit?

To calculate gross profit, subtract the cost of goods sold from revenue. The formula for gross profit is:

Gross profit = revenue – cost of goods sold

What is a good gross profit margin?

A good gross profit margin varies by industry, but generally, a higher gross profit margin indicates better profitability. For example, a company with a 50% gross profit margin is generally more profitable than a company with a 30% gross profit margin.

What is a good gross profit margin

What is net profit?

Net profit is the revenue a company generates minus all expenses, including COGS, marketing, administrative, and overhead costs. Net profit reflects the profitability of a company after all expenses are taken into account.

What is included in net profit?

Net profit includes all expenses, including COGS, marketing, administrative, and overhead costs.

How to calculate net profit?

To calculate net profit, subtract all expenses from revenue. The formula for net profit is:

Net profit = revenue – all expenses

What is a good net profit margin?

A good net profit margin varies by industry, but generally, a higher net profit margin indicates better profitability. For example, a company with a 20% net profit margin is generally more profitable than a company with a 10% net profit margin.

Plan Your Cash Flow
Start your free trial

Gross profit vs. net profit

The key difference between gross profit and net profit is that gross profit only considers the direct costs of producing a product or service, while net profit takes into account all expenses. Gross profit is important because it reflects the profitability of a company’s core business activities. However, net profit is a more comprehensive measure of a company’s profitability because it takes into account all expenses.

Limitations of gross profit and net income

While gross profit and net profit are important measures of a company’s financial performance, they do have some limitations. Gross profit does not take into account other expenses such as marketing, administrative, and operating expenses, which can have a significant impact on a company’s profitability. Similarly, net profit can be influenced by non-operating expenses such as interest and taxes, which can distort the true picture of a company’s core business profitability.

Gross profit vs. net income examples

Let’s take a look at an example to illustrate the difference between gross profit and net income. Suppose a company generates $100,000 in revenue and incurs $60,000 in COGS, $10,000 in marketing expenses, and $5,000 in administrative expenses. The gross profit would be:

Gross Profit = $100,000 – $60,000 = $40,000

The net profit would be:

Net Profit = $100,000 – ($60,000 + $10,000 + $5,000) =Net Profit = $25,000

In this example, the gross profit is $40,000, which reflects the profitability of the company’s core business activities. However, the net profit is $25,000, which takes into account all expenses, including COGS, marketing, and administrative expenses.

Gross profit and net profit in a financial modelling tool

In financial modelling, gross profit and net profit are important measures of a company’s financial performance. Brixx’s financial modelling software is an excellent tool for analyzing and forecasting the gross profit and net profit of a business. With Brixx, business owners and investors can easily model different scenarios, analyze the impact of various factors on profitability, and make informed decisions to optimize their business operations. Whether you’re a startup or an established business, Brixx can help you gain valuable insights into your financial performance and achieve your business goals.

Which is more important, gross profit or net profit?

Both gross profit and net profit are important, but net profit is generally considered more important because it takes into account all expenses and provides a more accurate picture of a company’s financial health. However, a high gross profit margin indicates that a company is efficiently managing its costs, which can be a good sign for investors.

What are some common mistakes businesses make when calculating gross profit and net profit?

Some common mistakes businesses make when calculating gross profit and net profit include not including all direct costs in the cost of goods sold, not accounting for all expenses when calculating net profit, and not adjusting for non-recurring expenses or revenue. It’s important to carefully review financial statements and consult with an accountant or financial advisor if there are any questions or concerns.

Related articles

Get started FREE with Brixx today

and take the first steps to planning your business’ future development

Start free trial