The primary difference between gross profit and profit (specifically net profit is what is typically meant by “profit” or “net income”) lies in the expenses deducted from total revenue.1
Gross profit is an initial measure of a company’s profitability, while net profit is the final, true “bottom line” profit.2
Gross Profit
Gross Profit is the revenue remaining after deducting only the Cost of Goods Sold (COGS), which are the direct costs associated with producing the goods or services sold.3
- Formula:
- What it includes: Direct costs like raw materials, direct labor, and manufacturing overhead.4
- What it tells you: It measures the operational efficiency of the business’s production and pricing—how effectively a company uses its labor and supplies to create its products.5
Profit (Net Profit)
Profit or Net Profit (also called Net Income) is the remaining income after all expenses have been subtracted from total revenue.6
- Formula:
(Essentially, Net Profit = Total Revenue – All Expenses)7
- What it includes: It accounts for COGS plus all other business expenses, such as:
- Operating expenses (e.g., salaries, rent, utilities, marketing, administrative costs).8
- Interest expense on debt.9
- Taxes.10
- What it tells you: It provides the most comprehensive view of a company’s overall financial health and profitability—it’s the actual money the business gets to keep.11
The key difference is the scope of expenses considered:
| Feature | Gross Profit | Net Profit (Profit) |
| Expenses Deducted | Only the Cost of Goods Sold (COGS) (direct costs). | All business expenses, including COGS, operating expenses, interest, and taxes. |
| Focus | Product efficiency and pricing strategy. | Overall company profitability and financial health (the “bottom line”). |
| Position on Income Statement | Higher up (calculated first). | The very last line. |
The calculation of net profit starts with gross profit, meaning a high gross profit is necessary, but not sufficient, to guarantee a high net profit.12
Profit is the total amount left after subtracting all expenses (including operating costs, taxes, interest, etc.) from total revenue. It’s the bottom line, often called net profit or net income.
Gross profit is the amount left after subtracting only the cost of goods sold (COGS) from total revenue. It doesn’t account for other expenses like rent, salaries, or taxes.
Key Difference: Gross profit focuses solely on revenue minus direct production costs, while profit includes all expenses. For example, if a business has $100,000 in revenue, $40,000 in COGS, and $30,000 in other expenses, gross profit is $60,000 ($100,000 – $40,000), but profit is $30,000 ($60,000 – $30,000).
Of course! This is a fundamental and important distinction in business and accounting.
Here’s a simple breakdown of the difference between Gross Profit and Profit (Net Profit).
The Short Answer (The Coffee Shop Analogy)
Imagine you sell a cup of coffee for $5.
- Gross Profit: This is the money you have left after you pay for the coffee beans, the cup, and the lid. Let’s say those cost $2. Your Gross Profit is $3.
- Profit (Net Profit): This is the money you have left after you also pay for everything else: the barista’s salary, the rent for the shop, the electricity, the marketing, and taxes. Let’s say those cost another $1.50. Your Net Profit is $1.50.
In a nutshell: Gross Profit only considers the direct cost of the product. Net Profit is the final bottom line after all costs.
Detailed Breakdown
Let’s look at them in the context of an Income Statement (also called a Profit & Loss Statement).
1. Gross Profit
- What it is: The profit a company makes after deducting the costs directly associated with making and selling its products or services. These are known as Cost of Goods Sold (COGS).
- What it measures: Production and direct sales efficiency. A high gross profit margin means you are producing your goods efficiently and have strong pricing power.
- Formula: Gross Profit = Revenue – Cost of Goods Sold (COGS)
- What’s included in COGS?
- Raw materials
- Direct labor (e.g., factory workers’ wages)
- Manufacturing overhead
- Cost of shipping the product to the customer
2. Net Profit (Also called Net Income or The Bottom Line)
- What it is: The actual profit a company has earned after deducting ALL expenses from its total revenue. This is the most comprehensive measure of profitability.
- What it measures: Overall business health and efficiency. It shows how well the entire company is being managed, including both operational and financial decisions.
- Formula: Net Profit = Gross Profit – Operating Expenses – Interest – Taxes
- What other expenses are deducted?
- Operating Expenses (OpEx): Rent, marketing, salaries for admin staff, utilities, R&D, office supplies.
- Interest: Interest paid on loans.
- Taxes: Income taxes.
Side-by-Side Comparison
| Feature | Gross Profit | Net Profit (Net Income) |
|---|---|---|
| Definition | Revenue minus Cost of Goods Sold (COGS) | Gross Profit minus All Other Expenses |
| Purpose | Measures production efficiency and core product profitability. | Measures the overall profitability and health of the entire business. |
| Position on P&L | Appears first, near the top. | Appears last, at the very bottom (hence “the bottom line”). |
| Expenses Deducted | Only direct, production-related costs (COGS). | All expenses: Operating, Interest, and Taxes. |
| Impact | A low Gross Profit suggests a problem with product costs or pricing. | A low Net Profit suggests a problem with overall cost management or high overhead. |
Why the Distinction Matters
- For a Business Owner: If your Gross Profit is healthy but your Net Profit is low, your core product is profitable, but your operating expenses (like rent or marketing) are too high. This tells you exactly where to focus your cost-cutting efforts.
- For an Investor: Gross Profit shows the fundamental strength of the business model. Net Profit shows how effectively management runs the entire operation and what the actual return on investment will be.
Example Using Simple Numbers
Let’s look at a fictional company’s Income Statement:
| Item | Amount | Calculation |
|---|---|---|
| Total Revenue (Sales) | $1,000,000 | |
| Less: Cost of Goods Sold (COGS) | -$400,000 | |
| Gross Profit | $600,000 | $1,000,000 – $400,000 |
| Gross Profit Margin | 60% | ($600,000 / $1,000,000) |
| Less: Operating Expenses | -$300,000 | (Rent, Salaries, Marketing, etc.) |
| Less: Interest | -$50,000 | |
| Less: Taxes | -$75,000 | |
| Net Profit (Net Income) | $175,000 | $600,000 – $300,000 – $50,000 – $75,000 |
| Net Profit Margin | 17.5% | ($175,000 / $1,000,000) |
Conclusion: In this example, the company is efficient at making its product (60% gross margin), but after paying for all its other business operations, it keeps 17.5 cents of every dollar of revenue as final profit.
