What is profit, gross profit and net profit
- Arnold Shields
- Jun 13, 2019
- 2 min read
Updated: May 21
Understanding Profit: Gross vs Net Profit and What They Really Mean for Your Business
Profit is one of the most commonly referenced terms in business, but few truly understand its components. While profit isn’t the only measure of success, it plays a critical role in tracking your business’s financial health and planning for the future.
There are two essential types of profit every business owner should understand: Gross Profit and Net Profit.
Gross Profit: The First Indicator of Business Viability
Gross profit is calculated as your total revenue from sales minus the direct costs of producing those goods or delivering those services—commonly referred to as Cost of Goods Sold (COGS).
This figure helps you evaluate whether your core business activities are profitable before factoring in administrative or operational costs.
For example: If you sell handcrafted furniture, gross profit tells you how much you earn after deducting material costs and labour directly involved in creating each piece.
Tracking gross profit by product or service can help identify which offerings are pulling their weight. If something consistently delivers negative gross profit, it’s time to reassess its future or optimise production efficiency.
Net Profit: The Bottom Line
Net profit takes gross profit and subtracts overhead expenses and adds any non-operating income (such as the sale of assets or interest earned).
Overhead includes ongoing costs such as:
Rent and utilities
Insurance
Salaries of admin staff
Marketing and subscriptions
Annual business registrations
Net profit is often referred to as “the bottom line” because it represents your business’s true profitability after all expenses are accounted for.
Even if a business generates strong sales and gross profit, high overhead or poor cash flow management can still result in a negative net profit.
Why This Matters for Strategic Planning
Understanding the distinction between gross and net profit is essential for:
Pricing strategies
Budgeting and cost control
Forecasting growth
Securing finance
Make it a habit to regularly review your income and expenses, not just at tax time. Up-to-date books are key to making sound business decisions and avoiding financial blind spots.
Disclaimer:
The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.
