Net profit vs. gross profit: What is the difference, and how do you calculate them?

Published

May 6, 2025

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You’re selling more than ever, but profits aren’t where they should be. Something’s getting lost between revenue and your bottom line. Maybe your cost of goods sold is climbing? Maybe operating expenses are cutting into your gains? When you understand the difference between net profit and gross profit, you can pinpoint where your problem is—and fix it. More than what your business is earning, these two metrics show you where it needs attention.

In this article, we’ll break down the difference between gross and net profit, show you how to calculate each, and explain why they both matter in day-to-day financial planning.

What is gross profit?

Gross profit is the revenue your business earns from selling products or services, minus the cost of goods sold (COGS). It shows how well your business translates sales into earnings.

This metric is especially important for finance teams, managers, investors, and anyone else who needs to understand how well the business performs its main function: generating money. A strong gross profit points to healthy pricing and prudent cost control. A weak one might point to operational inefficiencies or margin pressure.

What is net profit?

Net profit is the money your business keeps after subtracting all expenses, including operating costs, taxes, and interest. It also factors in non-operating income. It’s the final line on the income statement and, for many stakeholders, it’s the one that matters the most.

Net profit reflects your business’s overall profitability. More than what you sell or produce, it’s the proof that your entire business model holds up. In financial reporting, this number helps investors, lenders, and owners measure long-term viability and guides strategic decisions around growth and investment. For decision-makers, it determines how much can be set aside as retained earnings for future growth, debt reduction, or investment.

The importance of net profit and gross profit

Net profit and gross profit aren’t just about how much money your business makes; they’re important indicators of where your margins are strong and where you might be exposed. Gross profit can help you test pricing decisions, monitor production efficiency, and control cost creep before it impacts the bottom line. Net profit shows you whether your business model works or if you need to make changes to your operating model to stay in the black.

In isolation, neither metric gives you the full story. You need both for a complete understanding of how well your business earns and spends. Gross profit signals performance issues early. Net profit confirms whether you’re running the business efficiently. Together, they turn raw numbers into a narrative that drives decisions.

What are the main differences between net profit and gross profit?

When you’re reviewing your business financials, it’s not enough to know that you’ve turned a profit. You need to know where it’s coming from and what it means. That’s where the distinction between gross profit and net profit comes in.

One helps you understand whether your sales translate into revenue, the other reveals whether your business can sustain itself over time. Understanding how they differ helps you evaluate performance accurately and choose the right benchmarks to evaluate growth.

1. Definition and components

Gross profit is your revenue minus the direct costs tied to producing what you sell. It tells you how much the business earns before factoring in any operating expenses.

Net profit goes a step further, subtracting operating expenses, taxes, interest, and any other costs from your total revenue for a comprehensive analysis of your profitability.

The difference matters because gross profit shows efficiency at the production level, while net profit looks at your overall financial performance.

2. Impact on business decisions

Gross profit tends to inform cost-benefit analysis at the operational level, which net profit supports high-level planning for business-wide initiatives.

If you’re trying to improve your pricing strategy, reduce direct costs, or evaluate your COGS, you’ll rely on gross profit. It’s also a useful tool for evaluating short-term decisions like supplier contracts and production targets.

Net profit, on the other hand, drives big-picture planning and helps determine whether you can afford to expand, hire, or reinvest. A strong gross margin can’t save you if you have high operating expenses or debt payments. Both metrics are critical, but they inform different types of decisions.

3. Use in financial statements

Both gross profit and net profit appear on your income statement, but in different places. Gross profit shows up near the top, after COGS, while net profit sits at the bottom. Lenders, investors, and executives look at net income to assess whether a company is truly profitable, but gross profit helps them understand the health of its revenue-generating activities.

How to find gross profit: 4 steps

Gross profit shows how much your business earns after covering the direct costs of producing your product or service. It’s a crucial metric for tracking pricing efficiency, cost control, and profitability before overhead or taxes come into play. A clear gross profit example can reveal how even small changes in pricing or product costs can impact margins more than you might expect.

Step 1. Determine total revenue

Start by calculating your total revenue from the sales of goods or services. Be careful—you don’t want to include income from other sources. Gross profit is designed to measure how well your business turns sales into earnings, so you need to exclude non-operating income like investment returns and asset sales to ensure that the total reflects only your core business performance.

Example: Apex Corp. manufactures and sells high-end bikes. In Q1 2025, it sold 2,000 bicycles at $800 each, generating a total revenue of $1.6 million.

Step 2. Calculate the cost of goods sold (COGS)

Next, determine your costs of goods sold (COGS), also known as your direct costs. To find it, add up what you pay in order to produce your product or service. If you sell physical goods, this includes things like materials, factory labor, packaging, and shipping. If you sell services, think about software and tools, travel expenses, or contractor invoices.

Example: Apex Corp. spent $500,00 on aluminum and carbon fiber, $300,000 on factory wages, and $100,000 on assembly and shipping for a total COGS of $900,000.

Step 3. Subtract COGS from total revenue

Now, subtract your COGS from the total revenue from Step 1. The result is your gross profit, which reflects how much money your business has in the bank for operating expenses like rent, marketing, employee salaries, and any other essential expenses that keep the business running.

Example: When Apex Corp. subtracts $900,000 in COGS from total revenues of $1.6 million, the company shows a gross profit of $700,000 in Q1.

Step 4. Analyze the result against industry benchmarks

Taken in isolation, a gross profit number doesn’t tell you much more than whether you can pay the bills. To extract meaningful insights, you need to compare it to historical data or industry benchmarks. A higher gross profit margin might suggest pricing strength or tight cost control. A lower one could be a red flag for rising material costs, process inefficiencies, or pricing issues.

Example: Apex Corp. has a gross profit margin of 43%, slightly above the cycling industry average of 40%. Based on this information, leadership feels confident that the company is managing production costs effectively and can continue charging premium prices.

How to calculate net profit: 5 steps

Calculating net profit is a simple, powerful way to measure what your business really earns. Once you understand the formula for net profit, it becomes easier to spot where your business might be losing money due to factors like high overhead, unforeseen tax liabilities, or weak margins.

Step 1. Consider total revenue

Start with your total revenue from sales of goods or services (just like you did for gross profit). This is your top-line figure and the foundation of the rest of the calculation, so it’s important to be precise.

Example: In 2024, startup Widgets.io earned $400,000 from software subscriptions, $75,000 from consulting services, and $25,000 from product sales for a total revenue of $500,000.

Step 2. Deduct all operating expenses

Next, subtract all of your operating expenses. These are the recurring costs required to run the business, like salaries, rent, software licenses, insurance, and marketing. This step gives you a clear view of how much cash you have left after keeping the lights on.

Example: Widgets.io spent $150,000 on salaries, $50,000 on rent and utilities, $60,000 on software and IT infrastructure, and $60,000 on marketing and admin for a total of $320,000 in operating expenses. After subtracting this from gross profit, Widgets.io has $180,000 left.

Step 3. Subtract taxes and interest

Now take out taxes and interest payments. This includes income taxes and interest on any business loans or lines of credit. These costs don’t directly support operations—that’s why they’re a separate step in the process—but they do reduce what your business keeps.

Example: Widgets.io paid $20,000 in business taxes and $10,000 in interest on a working capital loan. That takes a further $30,000 from the remaining earnings for a total of $150,000.

Step 4. Include any additional income

If your business brought in income from sources outside normal operations, like investments, grants, or asset sales, add it back here. By keeping these revenue streams separate, you accurately capture the increase to your net profit without incorrectly attributing income not tied to sales or production to gross profit.

Example: Widgets.io earned $5,000 in interest from a short-term investment account, which means the total earnings increase to $155,000.

Step 5. Review your net profit

In this step, you finally reach net profit: the amount your business earned after paying every bill and accounting for every dollar in and out. This is what shows up at the bottom of your income statement.

Example: Widgets.io can report a net profit of $155,000 in 2024.

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When to use net profit vs. gross profit for business expenses

Net profit and gross profit both tell important stories about how your business makes and spends money, but they shape your approach to business expenses in different ways. Gross profit shows how well you control direct costs, which net profit determines whether your business can grow, pay down debt, or survive a tough quarter. Understanding both allows you to budget smarter, price better, and steer clear of overspending.

Net profit and business expenses

Net profit comprises all your earnings after you take care of expenses beyond production. It’s a key tool for business expenses, including:

Staying in control of your operating expenses
Building realistic budgets
Deciding if you can afford to pay off debt or reinvest

A lower-than-expected net income can also be a signal that you need to take a closer look at fixed costs and variable costs.

Gross profit and business expenses

Gross profit tells you how efficiently you’re delivering your product or service. When you look at this number, you can:

See whether direct costs, like materials and labor, may be too high
Shape your pricing strategy
Decide how to allocate resources.

A healthy gross profit margin gives you breathing room to cover your other business expenses without cutting into net profit.

3 Tips to use net profit and gross profit

Understanding the difference between gross profit and net profit is just the start. To see the impact on your business’s financial health, you need to apply each metric where it matters. Gross profit helps you track efficiency in production and pricing, while net profit shows whether your business turns a profit after expenses. Here’s how to use both figures for effective financial planning.

1. Reinvest gross profit strategically

Go beyond recording gross product as a win and decide how to allocate it for growth or security. Strong margins give you space to invest in better equipment, strategic hires, or higher-quality materials. Focus on reinvestments that lower your direct costs or drive long-term revenue without bloating your operating expenses.

2. Balance profitability with expense management

A strong gross income is only one piece of the puzzle. Sky-high operating expenses can wipe out your gains—use net profit to ensure that spending stays in line with your revenue. Managing business expenses carefully protects your bottom line and helps you make decisions based on what the business earns (not just what it brings in). Business budgeting software can help you track these relationships in real time, making it easier to adjust spending proactively.

3. Plan for taxes and future investments

Model future taxes, forecast cash flow, and decide how much income to retain or distribute based on your net income. Relying on gross profit for these decisions can lead you to overestimate how much cash you have on hand, and sound planning uses both calculations to avoid surprises and keep business finances aligned with long-term goals.

Streamline profit management with Rippling

Good profit management starts with visibility, and that’s exactly what you get with Rippling’s expense management software. Rippling consolidates all of your company’s finances—from payroll and benefits to corporate cards and expense management–giving you an up-to-date view of cash flow across your company and offering unprecedented control over spending patterns.

While most expense management solutions only allow for basic employee-manager approval chains, with Rippling’s spend management suite, you can set hyper-custom policies based on the vendor, dollar amount, and expense category, helping you block out-of-policy expenses with ease. You can also tee up automated workflows that help you control spend, like triggering an alert when a department’s expenses sharply increase.

With Rippling you can:

Automatically route expenses and bills to the right approver every time.
Flag out-of-policy spending with hyper-custom policies, like by vendor or value, for further review.
Close the books faster with AI-powered transaction categorization, and integration with your accounting systems.

FAQs on net profit vs gross profit

How can improving gross profit impact a business's success?

Improving gross profit can impact your business’s success by increasing the amount you earn from each sale after subtracting your direct costs. With more revenue from each sale, you have more room to increase operating expenses, invest in growth, and, ultimately, boost your net profit. Strong gross margins also make it easier to absorb unexpected costs and maintain strong financial health during difficult periods.

Can a business have a high gross profit and still suffer losses?

Yes, a business can have a high gross profit and still suffer losses. It’s also more common than you might expect. A business can report strong gross profit, meaning it earns well from sales after direct costs, but still lose money due to high operating expenses, taxes, or debt payments. That’s why calculating net profit is so important: it’s the clearer measure of whether a business is truly profitable.

Is net profit before or after tax?

Net profit is calculated after tax. It’s what your business actually keeps once you’ve covered your operating expenses and paid your taxes. If you’re looking at the income statement, it’s the final number on the sheet, also known as the “bottom line.” Unlike gross profit, which reflects all the income your business generated, but not its debts and obligations, net profit gives you a more accurate picture of how much you actually made.

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