October 31, 2022
Explainer

Gross profit vs. net profit: Differences, how to calculate and formulas

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Understanding your company’s profits is one of the key ways to determine the health of your business. Keeping a close eye on financial metrics, including its margins, can help you determine whether you need to make changes to your business if it is not on financially stable footing. 

However, when thinking about profit, it’s important to understand the difference between gross profits and net profits. It’s common for entrepreneurs and business leaders to confuse the two types of profit because they have many similarities.

Gross profits and net profits are both important metrics that can give you insight into your company, including to help understand its profit margins, and you’ll find both gross profits and net profits on a company’s income statement.  

Both gross profit and net profit are backward-looking measures, focused on the amount of money a company made on a period that has already passed. But there are also some critical distinctions between the two. 

What is gross profit?

Gross profit is the amount of money a company earns after accounting for the costs incurred to create those sales. Also called gross income, gross profit typically appears as a line on a company’s income statement. Gross profit does not take operating expenses into account. 

The more money a company makes on each sale, the higher its gross profit. Companies use gross profits to pay for the operating costs of running a business. 

Why you need to know your gross profit

Gross profit is a measure of your company’s revenue that does not take into account expenses such as rent, utilities, or taxes. The main reason you need to know your gross profit is because it can help you understand how much you’re spending to generate revenue and evaluate the company’s financial performance

You may also need to know your gross profit if you’re in talks with potential investors or new vendors. Business credit card and prepaid business debit card issuers also often ask for information about a company’s profits before deciding whether to approve the company for a card. 

However, understanding your gross revenue and your gross profit alone does not give you a complete financial picture of the company.

How to calculate gross profit

To calculate net profit, use the following formula: 

gross profit = total revenue – cost of goods sold

What is net profit?

Net profit is a more comprehensive measure of a company’s financial health than gross profit, and it’s a bit more complicated to calculate. Net profit is the amount of total money a company earns after subtracting the cost of goods sold (COGS), as materials and labor expenses, as well as any other expenses incurred by the business. In addition to direct costs, net profit also includes other types of non-sales revenue that a company receives, such as interest on investments or for the sale of an asset. 

Why you need to know your net profit

You need to know your company’s net profit because it’s the amount of money a company ultimately generates in a period. Net profit is the number that companies talk about when discussing their bottom line.   

While you might use net profit to make strategic decisions about your business, investors or lenders might look at net profits as a way of determining whether it makes financial sense for them to put money into your business.
 

How to calculate net profit

To calculate net profit, use the following formula:

Net profit = gross profit – operating expenses -interest payments – income taxes

Net profit will be a lower number than gross profit, but it provides the business owner with a more accurate picture of a company’s financial health. 

Gross profit vs net profit

Gross profit and net profit are both measures of a company’s profitability. Gross profit can show the cost of generating revenue, but net profit is a measure of the company’s overall profitability. You need to know a company’s gross profit in order to calculate its net profit. 

Net profit on financial statements

Net profit typically appears as a line item on a company’s income statement. It typically does not appear on other financial documents including the cash flow statement or the balance sheet.

You can also find the net profit on a profit and loss statement, which breaks down your gross income, cost of sales, and other overhead expenses. 

Elevate your net profit with Ramp

Adopting a platform like Ramp can make all the difference in your net profitability and reduce the costs in your operating budget. That’s because Ramp can help your business save time and money, through both its corporate cards and its expense-management platform, ultimately reducing expenses and increasing your net profit. Here’s a look at a few Ramp features that can boost your bottom line:

Lower vendor costs

Ramp has a range of partner rewards that add up to more than $350,000 in savings. These include 25% off your first year of 1Password, $25,000 in in-fee processing from Stripe or up to $100,000 in credits for Amazon Web services. The less you can pay your vendors, the higher your net profit.

Control travel expenses

Ramp for Travel allows you to control individual user expenses and make sure that they conform to your travel expense policies. Saving money on travel by eliminating off-policy expenses and streamlining the process of filing expense reports can result in a significant net profit increase over time.

Automate finances

By using Ramp to automate your finance function, including both expenses management and invoice processing, your company will gain real-time insights into all company spending. Tracking business expenses in real time may result in actionable intelligence you can put in place to reduce spending and boost your bottom line. Ramp connects with most small business finance and accounting software and business budgeting software to further integrate your experience. 

Automating finance also makes it easier for companies to engage in Financial Planning and Analysis (FP&A) to help the company use financial insights to create a strategic plan for the business going forward. 

Empower your employees

Creating a healthy spending culture within your company can ultimately increase the company net profit. That’s because empowering employees to make spend decisions (with guardrails) can result in them taking more responsibility over those decisions to keep the company’s spending and saving on the right track.

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FAQs
What is the difference between net profit and net income?

Net income and net profits refer to the same thing. Both are terms referring to the amount of money a company makes after all its expenses.

What is the difference between net profit and revenue?

Revenue is the amount of money that a company earns through sales of goods or services. Net profit, on the other hand, is a measure of the amount of money a company makes through sales and other sources, after paying out expenses, including production and labor costs, taxes, and interest on debt. 

Is net profit different than operating profit?

Yes. Net profit is the ultimate profit a business makes after all expense. Operating profit, however, is the amount of revenue a company has left over after deducting the cost of operations. That includes overhead expenses, such as rent or utility payments, but it does not take into account non-operational expenses, such as debt payments. 

What is net profit margin?

Net profit margin is a metric that shows how much net income every dollar of revenue produces. Typically, businesses express their net profit margin using a percentage. 

What is the difference between gross profit and gross revenue?

Gross revenue is simply all of the money that a company earns through sales. Gross profit, on the other hand, is a measure of how of a company’s gross revenue it can keep after paying all its expenses.

What is the difference between gross profit and turnover?

Turnover and profit are both ways to measure a company’s revenue. Gross profit is the amount of money a company can keep after its expenses. Turnover, is another name for net sales, which is the total amount of money a company generates through sales. 

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