Understanding gross and net profit

As a business owner, it’s vital to understand all aspects of profit and loss. Part of that is understanding the difference between gross profit and net profit, and how it effects your overall financials.

Gross profit is the difference between a company’s total revenue and the cost of goods sold.

Net profit is gross profit minus overhead costs, operating costs, and income taxes.

In other words, gross profit measures how much money a company makes from its sales, while net profit measures how much money the company makes after it has paid for the costs of doing business. It measures how efficiently a company is converting its revenue into actual profits.

Some common expenses that are deducted from revenue in order to calculate net profit include rent, salaries, advertising, and the cost of goods sold.

Net profit can be further divided into two categories: operating income and non-operating income. Operating income measures the profits generated by a company’s core business operations, while non-operating income measures any other sources.

For example, if a company has $10,000 in revenue and $5,000 in costs of goods sold, then its gross profit is $5,000. If it then has $2,000 in other expenses such as rent and salaries, its net profit is $3,000.