People often get confused with the difference between Gross Profit and Net Profit. However, both are important measures of how well a business is doing. They tell you critical things about a company’s financial health, and it’s essential to understand the difference between them.
Gross profit is the profit a company makes after deducting the costs associated with making and selling its products or the costs associated with providing its services. Gross profit will appear on a company's income statement and can be calculated by subtracting the cost of goods sold (COGS) from revenue (sales). You can often find these figures on a company credit report.
Gross profit is one of the most important measures to determine the profitability of a business. This is because it reflects the efficiency of a company in terms of making use of its labour, raw material, and other supplies. A Creditsafe credit report will often show a business's profit & loss for the past five years, providing visibility of a company's financial health and performance when making a credit risk assessment.
Net profit is the selling price of your good minus ALL the costs of running your business. This is the figure that we usually mean when we refer to profit (but it’s always worth checking).
Net profit includes the same costs as your gross profit AND your overheads or fixed costs such as salaries, rent, software and bank charges.
Using a Creditsafe company credit report you can often view the net profit of a business within the Financials. The Profit and loss section may provide details on a company’s operating profit, pre-tax profit and retained profits and pre-tax profit margin.
Net profit is calculated using the following formula:
Sales - (Cost of Goods Sold + Operating Costs) = Net Profit
Put simply, net profit is a company’s bottom line. It’s what’s left after deducting all costs from total sales. — not just the cost of goods sold, but also other overheads and, usually, tax too.
Gross profit is the sales income minus the direct costs of getting the article to sale.
Net profit is the sales income minus all the business costs.
This article is intended as general information only and does not constitute advice in any way. For any specific questions, you may want to consult your legal advisor or accountant.
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