What is profit, gross profit and net profit

 

In business you will hear the term “profit” used at every turn. Though not the sole marker of business success, it is perhaps the most frequently used.

Therefore, it is essential your business understands what makes up profit, and how this impacts your short-term and long-term goals.

There are two main forms of profit: Gross Profit, and Net Profit.

Gross Profit

Gross profit is your income from sales of goods or services less the expenses directly incurred to make that sale. This is also referred to as income less Cost of Goods Sold (COGS). Gross profit can be measured as a summary across your whole product/service line, or on individual products or services.

Understanding this relationship is a useful tool in decision making and strategy building. If a product is making a negative gross profit, you may want to consider the potential future of the product or determine why sales are down or expenses are high.

Net Profit

Net profit is your gross profit, plus any other income unrelated to your normal business (i.e. sale of equipment, interest income, etc), less any overhead expenses.

Overhead expenses are the expenses which are incurred regardless of your selling volume. Whether you sell 1 hammer, or 10,000 hammers, you will still be paying an amount in overhead (such as rent of a warehouse, annual registrations, etc.)

Net profit is also referred to as ‘the bottom line’ and is the overall profitability of your business.

It is important to keep your income and expenses up to date to best utilise these business performance tools.