Questions · Business calculations
What is the difference between gross profit and net profit?
The answer
Gross profit is what is left from sales after paying for the goods you sold. Net profit is what is left after also paying every running expense, such as rent, salaries, electricity and loan interest. Gross profit shows whether your pricing works; net profit shows whether the business as a whole makes money.
Both figures start from the same sales. The difference is how many costs you subtract: gross profit takes away only the cost of the goods sold, while net profit takes away everything the business spent to run that month.
The two formulas
Cost of goods sold is what the items you sold cost you, worked out as opening stock + purchases − closing stock. Our page on cost of goods sold explains it. Running expenses are everything else: rent, salaries, electricity, packaging, transport, bank charges and loan interest.
A worked example
An invented gift shop has one month of figures, all before GST:
| Line | Amount |
|---|---|
| Net sales | ₹3,00,000 |
| Cost of goods sold | −₹1,95,000 |
| Gross profit | ₹1,05,000 (35% of sales) |
| Rent, salaries, electricity and other expenses | −₹78,000 |
| Net profit | ₹27,000 (9% of sales) |
The shop keeps ₹35 of every ₹100 sold after paying for the goods, but only ₹9 after running the shop.
What each one tells you
- Gross profit is about pricing and buying. If it falls, look at supplier prices, discounts, theft or damage, and whether you are selling more low-margin items. It is the basis for profit margin.
- Net profit is about the whole business. A shop with a healthy gross margin can still make a loss if rent and salaries are too high for its sales.
The two connect through break-even: running expenses divided by the gross margin gives the sales needed to make a net profit of zero. Here, ₹78,000 ÷ 0.35 = ₹2,22,857. Try it with your own numbers in the break-even calculator.
Common mistakes
- Using purchases instead of cost of goods sold. A month of heavy buying makes gross profit look far too low.
- Counting the owner's drawings as expenses. Money taken home is not a business cost; record it separately.
- Including GST in sales. GST collected is owed to the government, so it inflates both profits.
- Calling gross profit "profit". A supplier offer of "30% margin" is about gross profit, not what you take home.
Net profit before and after income tax are also different figures. How tax applies depends on how your business is set up, so check with your accountant. For the full method, read how to calculate business profit, and for setting up the records behind these figures, see how to track sales and expenses.
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General information, not legal, tax or financial advice. Published by Chameron Digital.