GlossaryGross profit vs. net profit (Comparison)

GLOSSARY

Gross profit vs net profit (comparison)

What’s the difference between gross and net profit?

Gross profit refers to the profit you make selling your goods and services after deducting your cost of goods sold (COGS).

On the other hand, net profit refers to the profit you make selling goods or services after deducting all operating expenses and business costs.

Thinking about gross profit vs. net profit comes down to how you’re looking to calculate your profitability and frame your business’s financial health.

Gross profit explained

To understand gross profit, you need to comprehend COGS. COGS are the immediate expenses incurred in the production, handling, and distribution of your goods or services.

(COGS does not include general overheads and operating expenses – like rent or power – or indirect business expenses like sales or marketing—it only includes direct costs.)

Gross profit formula

The formula used to calculate gross profit margin is as follows:

Gross Profit = Revenue – Cost of Goods Sold

To express gross profit margin as a percentage the formula is as follows:

Gross Profit Margin = (Revenue – COGS) / Revenue x 100

Net profit explained

On the other hand, net profit considers all overheads, expenses, and business costs on top of COGS. (It includes everything from rates and taxes to rent and equipment costs.)

A company’s net profit is thus a more complete picture of its overall profitability as it accounts for every cost incurred in running your entire business.

Net profit formula

The formula used to calculate net profit is as follows:

Net Profit = Revenue − Total Costs

To express this as a net profit margin percentage the formula is as follows:

Net Profit Margin = (Revenue – Total Costs) / Revenue x 100

Gross Vs Net Profit

Additional resources

Disclaimer
This glossary is intended for small business owners and contains definitions suited to their needs. For more comprehensive explanations, we recommend consulting an accounting or bookkeeping professional. Reckon does not offer accounting, tax, business, or legal advice.

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