Often mixed up and can be confusing to some, the difference between Gross Profit and Net Profit is easily explained and important to know.

Sales – Direct Cost (cost of sales) = GROSS PROFIT
Operating cost = NET PROFIT

What is profit?
Let’s start with what profit is.

Profit is a financial gain. It is the difference between the money spent (cost) and the money earned (sales).

What is gross profit?
Gross profit is when you take your sales and subtract the direct cost (cost of the goods you have sold). More specifically, direct cost is the amount of money spent to product the said goods.

Operating cost are not included in the direct cost. Therefore, gross profit is the profit you have made before operating costs have been subtracted.

What is net profit?
When you subtract all your operating costs, such as rent, telephone, interest, etc, we refer to the profit as net profit. If the number is negative, you are running at a net loss.

So, to calculate net profit you must know your gross profit. If your gross profit is too little to cover your operating cost, you need to relook at your company costing to see how to improve your business profitability.

If you need more clarity on this subject or any other accounting or financial dilemma, contact us today!