{"id":10038,"date":"2019-10-31T11:03:18","date_gmt":"2019-10-31T09:03:18","guid":{"rendered":"https:\/\/www.become.co\/blog\/?p=10038"},"modified":"2020-10-07T11:00:01","modified_gmt":"2020-10-07T08:00:01","slug":"gross-profit-vs-net-profit","status":"publish","type":"post","link":"https:\/\/www.become.co\/blog\/gross-profit-vs-net-profit\/","title":{"rendered":"Gross Profit vs Net Profit: What Are the Differences & How to Calculate"},"content":{"rendered":"\n

Profit – it\u2019s a pretty basic concept, right?<\/span><\/p>\n

More money means higher profits, which means your business is better off. Truthfully, it\u2019s not quite that simple.<\/span><\/p>\n

Get the full scoop on gross profit vs net profit with this guide.<\/span><\/p>\n\n

Gross profit vs net profit<\/span><\/h2>\n

Before we get into the difference between gross profit and net profit, let\u2019s first define what a profit margin is in more general terms.<\/span><\/p>\n\n

What is profit margin?<\/span><\/h3>\n

Your business\u2019s profit margin is a percentage value of how much your business earns for every dollar made in sales.<\/strong> The more money your business earns for every sale made, the higher your profit margin becomes.<\/span><\/p>\n

Gross profit vs net profit, on the other hand, are more specific (and different) measurements that are used to determine your business\u2019s financial health. Let\u2019s dig into the difference between gross profit and net profit.<\/span><\/p>\n\n

What is gross profit?<\/span><\/h3>\n

Gross profit is how much money your business earns (revenue) minus only the cost of goods sold (COGS)<\/strong>. But it should go without saying that there are many other expenses besides your COGS that your business must cover in order to keep running. So, gross profit is the measurement of profit <\/span>before <\/span><\/i>taking into account <\/span>all<\/span><\/i> expenses. In a nutshell, that\u2019s the key difference between gross and net profit.<\/span><\/p>\n\n

What is net profit?<\/span><\/h3>\n

Net profit is how much money your business earns minus all <\/i><\/strong>expenses, including taxes, operating expenses, loan repayments, COGS, and so on<\/strong>. Before you can calculate your business\u2019s net profits, you\u2019ll need to first measure your business\u2019s gross profit. If you do the math and your \u2018net profit\u2019 is a negative value, it would correctly be referred to as \u2018net loss\u2019.<\/span><\/p>\n

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Important note:<\/b> Net profit shouldn\u2019t be confused with net operating income, which is one of the factors considered when <\/span>calculating your debt service coverage ratio<\/span><\/a>.<\/span><\/p>\n<\/blockquote>\n

Given these definitions, your business\u2019s gross profit can be sky-high, but if you have lots of expenses to pay every month then your net profit could be much lower (or even negative).<\/span><\/p>\n

\"Gross<\/p>\n\n

Why you need to know the difference between gross and net profit<\/span><\/h2>\n

When your business\u2019s finances are measured and assessed, it could turn out that there\u2019s a big difference between gross profit and net profit.<\/span><\/p>\n

Maybe you\u2019re making a ton of sales and earning lots of money per sale (high gross profit), which would look great to investors or lenders. But, if they take a closer look at all of your business expenses and see that your net profit is unimpressive, you\u2019ll likely be seen as a less stable or less reliable business.<\/span><\/p>\n

However the numbers come out, and whether you\u2019re looking for additional funding through <\/span>alternative business financing or traditional bank loans<\/span><\/a>, the loan provider will want to see how much money you\u2019ll realistically have available to make repayments on time and in full.<\/span><\/p>\n

But lenders or investors aren\u2019t the only ones who will care about your business\u2019s gross profit vs net profit. You should also stay aware of the difference between gross and net profit so that you can manage your business responsibly!<\/span><\/p>\n

How knowing the difference between gross profit and net profit helps:<\/b>\u00a0<\/span><\/p>\n