The Difference Between Gross & Net Profit

Net profits and gross profits can be substantially different.

Small business owners must be able to place a meaningful number value on their earnings. Expressing this number accurately involves distinguishing between the cost of overhead and the cost of producing a product so these values can be factored in when calculating profitability.

Definition

Net profit is synonymous with bottom line. InvestorWords.com explains that net profit is calculated by subtracting total expenses from total revenue for a period of time. This is a good way to evaluate the total health of a company.

Definition

Gross profit is the sum of all sales minus the sum of all costs related to those sales such as raw materials, marketing and other expenses. Gross profits do not account for overhead not directly related to sales.

Significance

This distinction between net and gross profits is important because gross profits are what are taxable. Investopedia explains that net profits are the profits a company has earned after the gross profits are taxed.

References

• Investor Words: Gross Profit
• Investopedia: Net Profit
• Investor Words: Net Profit