metrics explained

Gross Profit vs Net Profit: What's the Difference?

Are you an entrepreneur or small business owner? If so, you need to understand the difference between gross profit and net profit. Keep reading to learn the definition of each, how to calculate each, and the key differences between the two.

What is Gross Profit?

Gross profit is the direct profit left over after deducting the cost of goods sold (COGS) from total revenue. COGS includes the cost of materials and direct labor needed to produce the product or service. In other words, it's the cost of everything directly related to making and selling your product or service.

To calculate gross profit, use the following formula:

Gross Profit = Total Revenue - Cost of Goods Sold

For example, let's say your business sells widgets for $100 each. The cost of materials needed to make each widget is $50. The direct labor cost to assemble the widget is $20. The total cost of goods sold would be $70 ($50 in materials + $20 in labor). Therefore, the gross profit would be $30 ($100 in revenue - $70 in COGS).

It's important to note that gross profit does not include indirect expenses, such as overhead costs (e.g., rent, utilities, marketing, etc.).

What is Net Profit?

Net profit is the total profit left over after deducting all expenses from total revenue. This includes both direct and indirect expenses. To calculate net profit, use the following formula:

Net Profit = Total Revenue - Total Expenses

For example, let's say your business has the following expenses:

  • Rent: $1,000
  • Utilities: $200
  • Marketing: $500
  • COGS (as calculated above): $70

The total expenses would be $1,770. Therefore, the net profit would be $230 ($1,000 in revenue - $1,770 in expenses).

It's important to note that net profit is also sometimes referred to as "net income" or "bottom line."

Key Differences Between Gross Profit and Net Profit

Now that you know the definition of each and how to calculate each, let's take a look at the key differences between gross profit and net profit:

  • Gross profit only includes direct expenses, while net profit includes both direct and indirect expenses.
  • Gross profit is calculated by subtracting the cost of goods sold from total revenue, while net profit is calculated by subtracting all expenses from total revenue.
  • Gross profit is the direct profit left over after deducting the cost of goods sold, while net profit is the total profit left over after deducting all expenses.

Now that you understand the difference between gross profit and net profit, you can start using this knowledge to make better business decisions. For example, you can use gross profit to calculate your business's markup (the difference between the cost of goods sold and the selling price). You can also use net profit to track your business's overall profitability.

Upgrade your financial models

Get started with Causal today.
Build models effortlessly, connect them directly to your data, and share them with interactive dashboards and beautiful visuals.