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

Business owners and finance professionals often track revenue metrics to shed light on their company's health. Given the complex elements that go into running a business, there are a number of different statistics and trends that managers may keep an eye on. Two of the most important ones are gross profit and net profit.

It's important not to use these terms interchangeably, as they measure different aspects of performance and financial health. If the two are conflated, confusion may arise among accounting teams that understand the terms differently. Knowing the distinction between the two is essential for making informed pricing, budgeting, and growth decisions.

In this guide, we'll clearly define gross profit and net profit, explain how to find each, compare their roles in financial analysis, and show how both illustrate a company’s health. We'll also take a look at Slash, a business banking platform with a complete analytics dashboard that unlocks real-time insights into cash flow and company spending, enabling easier profit calculations.¹

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What Is Gross Profit?

Gross profit is calculated by subtracting the cost of goods sold (CoGS) from your company's total revenue. The CoGS encompasses all expenses that directly relate to the sale of a product or service.

Expenses that can factor into CoGS may include the acquisition of raw materials, shipping, maintenance costs, and wages for employees involved in production. Service-based businesses may entail costs like acquisition of equipment and tools, depreciation of equipment or company vehicles, and wages for service workers. Depreciation is often considered an amortization expense, which means the cost is spread out over a long period of time. Vehicles are among the most common assets that accrue this expense.

As a formula, it looks like this:

Gross Profit = Net Sales Revenue - Cost of Goods Sold (CoGS)

For example, say a clothing outlet may earn $5 million in net revenue. Finding it gross profit would subtract costs like:

Cost of textiles = $1.2 million
New factory equipment = $250,000
Factory upkeep and maintenance = $250,000
Employee’s annual wages = $700k

$5M - ($1.2M - (2*250K) - 700K) = $2.6M gross profit

Businesses typically calculate gross profit using expense reports or income statements, which allows them to access a specific picture of how their production costs and processes affect their bottom line. Seeing this metric alongside other data can help managers identify cost-cutting opportunities, develop more efficient workflows, and set competitive prices that ensure profitability.

What is Net Profit?

Net profit (sometimes referred to as net income) provides a broader look at a business's financial health. This metric measures your company's total revenue, minus your cost of goods and all operating expenses incurred by the business. Operating expenses may include taxes, loan interest, administrative salaries, rent, and more.

When determining revenue as part of your net profit calculation, you'll also include any instance of profit that your company receives outside of the realm of selling goods and services, such as gains on investments and the sale of assets.

As a formula, it looks like this:

Net Profit = Total Revenue - Total Expenses

For example, a motorcycle company's net profit may consists of its net revenue ($20 million) and interest from investments ($200,000). Then, you would subtract:

CoGS = $14 million
Operating expenses = $1.8 million
Debt payments = $500,000)
Tax payments = $300,000)

(20M + 200K) - (14M - 1.8M - 500K - 300K) = $3.6 million in net profit.

Ultimately, net profit represents the total amount of money a company generates over a period of time. Calculating your business's net profit may unlock a picture of your company's operational efficiency, profitability, and sustainability.

Gross Profit vs Net Profit: Key Differences

Here are some of the most important differences between gross profit and net profit at a glance:

Gross Profit	Net Profit
Incorporates revenue from sales	Incorporates overall revenue, including investments and sold assets
Assesses company expenditures that relate to products and services sold	Assesses all company expenditures from advertising to taxes
Stands for the efficiency of the sale of goods	Stands for the sustainability of a company as a whole
May be improved by sourcing cheaper materials or adjusting prices	May be improved by reassessing and trimming operational expenses
Often goes near the top of income statement	Often goes on bottom of income statement (i.e. the bottom line)

A quick way to remember the difference is by understanding direct costs and indirect costs. Direct costs are expenses that can be traced back to the production of a specific product or service, while indirect costs are expenses that do not connect to a product or service. As a rule of thumb, you generally deduct direct costs from revenue when calculating gross profits, and you deduct both indirect and direct costs from revenue when calculating net profits.

After doing the math, you’ll be left with a percentage of profitability per dollar of sales, which is your profit margin. Gross profit margin and net profit margin correlate with the two metrics we've been discussing: your gross profit margin is the percentage of your sales revenue above your CoGS, while net profit margin is the percentage of your total revenue above your operating expenses. In either case, if your revenue was $1.25 million and your expenses were $1 million, you’d have a 25% profit margin.

Why Both Metrics Matter For Business Decisions

While it's important to ensure gross profit and net profit are calculated and categorized separately, business leaders often use them both in tandem to provide a complete picture of company performance. Gross profit reveals how efficiently a business produces its product or delivers its service, and net profit shows whether that business is sustainable after accounting for all operating costs.

Here are some ways these metrics can be useful:

Identifying Inefficiencies

If a business discovers that its gross profit is disproportionately higher than its net profit, it may indicate that operating expenses are bloated. Some indirect costs, such as marketing and advertising, may offer room for cost savings among companies that need to assist their net profits.

On the other hand, a low gross profit alongside a high net profit may indicate that the manufacturing process is inefficient. A business's CoGS can be impacted by factors like expensive raw materials or unreliable machinery.

Pricing and Cost Control

Low gross profits can also lead business owners to reconsider pricing on their products or services. If a company acquires its materials at reasonable costs and their manufacturing process is as efficient as possible, yet gross margins are low, pricing may be the only thing left to adjust in order to boost gross profits. In some (rare) cases, high gross profits reveal an opportunity for prices to be lowered in order to gain an advantage on competition.

Staffing and Salaries

When companies struggle with thin profit margins, tough decisions about layoffs may lie ahead. Breaking down gross profit and net profit can reveal where money can be saved across different levels of staffing.

Since gross profit concerns direct costs, executives may decide to hire fewer workers in sales or manufacturing. Companies that are looking to raise their net profits can reassess higher-paid individuals that work in administrative positions.

Investor and Lender Evaluation

Net profit is particularly important to third parties assessing your company's health and momentum. Investors can consider net profit when deciding whether or not to acquire a stake in a business, and lenders may use the number to determine how easily a company could repay potential loans. They may also consider gross profit when assessing a business’s momentum and forecasting, but net profit is typically prioritized due to its indication of true sustainability.

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Common Mistakes When Interpreting Profit Metrics

Mixing up gross and net profit or miscalculating your expenditures can lead to mistakes that tell an inaccurate story about your company’s financial health. Here are some common ones to avoid:

Fixating on gross profit: If your business thrives on profit margins from sold goods, you may be tempted to focus on your CoGS and maximize your gross profit. When all your attention is on direct costs, however, you may miss out on significant cost saving opportunities among your operating expenses.
Fixating on net profit: The inverse problem is ignoring your gross profit in favor of your net profit. While it’s important to maintain a positive cash flow, you shouldn’t forget to optimize your procurement and manufacturing processes, as they could quietly be costing your company money.
Losing sight of industry context: All businesses aim to maintain positive gross and net profits, but different industries have different relationships between the two metrics. For instance, companies that manufacture physical goods may prioritize gross profit, as their revenue and expenditures largely revolve around their CoGS. On the other hand, service-based businesses like SaaS companies spend less on producing and selling and more on operating expenses.
Using the wrong revenue: Gross profit is calculated with revenue tied to the sale of goods, and net profit uses revenue from both sold goods and other sources like interest from investments. Mixing these up can lead to very different conclusions.
Ignoring one-time costs: A company’s income statement may include single unplanned expenses like regulatory fines, debt refinancing, or office renovations. These can sometimes be considered “non-operating expenses”, and are thereby forgotten when calculating profits. Since they’re still part of your company’s cash flow, they should be included.

How Slash Can Help You Make Decisions With Financial Clarity

It’s difficult to get a complete understanding of your company’s financial sustainability without a clear view of both gross profit and net profit. At the same time, gaining that clarity can be challenging without the right tools. With Slash, it doesn’t have to be. Our tools help you monitor all your inflows and outflows in real time, so you always have a clear, consistent picture of your financial performance.

Slash is a business banking platform that offers an all-in-one dashboard with consolidated revenue, expense reports, corporate card spend, and more. With a complete view of your company’s cash flow, it’s no longer necessary to search through fragmented systems and dig through invoices to gather expenses and prepare an income statement. Our dashboard updates in real time, allowing users to track their business’s revenue and profitability without having to wait for month-end reconciliation.

When it comes to calculating and acting upon gross and net profits, companies have to move nimbly. The Slash dashboard gives operators a sharper, data-driven foundation for budgeting, forecasting, and strategic decision-making.

The Slash platform also offers features such as:

Native crypto support: Hold, send, and receive stablecoins such as USDC and USDT across eight supported blockchains.⁴ Users can also convert company funds into stablecoins using our built-in on/off ramps.
Slash Visa® Platinum Card: Earn up to 2% cash back on business expenses, set customizable spending controls and limits, and issue unlimited virtual cards for your team members, vendor payments, and subscriptions.
Accounting integrations: Slash connects two-ways with QuickBooks Online and Xero to streamline your month-end close. All card and payment data can be exported for easier reconciliation and more accurate, real-time expense reporting.

When businesses consistently track and interpret both gross and net profit, they make better decisions around pricing, cost control, and sustainable growth. Tracking these metrics becomes easier with Slash.

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Frequently asked questions

What are some alternatives to using gross profit and net profit?

Return on Assets (ROA): Tells you how efficiently a company uses its assets to generate profits
Cash Flow From Operations (CFFO): Tells you how much cash a company generates from day-to-day business activities
Earnings Before Interest and Taxes (EBIT): Believe it or not, this figure tells you a company's earnings before interest and taxes

How often should businesses review gross and net profit?

It's good to review your business's profits each month to track performance, manage cash flow, and adjust strategies. You may miss out on trends by waiting longer, and sample sizes may be too small if you review more often.

How do you calculate Cost of Goods Sold?

Cost of Goods Sold is found by adding the cost of your initial inventory and the purchases made during the period, then subtracting the costs of your ending inventory. The formula is:

Cost of Goods Sold = (beginning inventory + purchases) – ending inventory

As is the case with something like operating expenses, a wide swath of different things can be considered inventory, so it's helpful to do research regarding your business and industry.