Gross profit tells you how efficiently you produce or buy what you sell. Net profit tells you what the whole operation actually keeps. They answer different questions, and conflating them is how businesses end up profitable on paper and broke in practice.
By Jessica MartinezA spreadsheet can show a healthy 42% gross margin next to a bank balance that tells a completely different story, and both numbers can be correct at the same time. The gap between them is the entire reason gross and net profit exist as separate figures instead of one.
Gross Profit = Revenue - Cost of Goods Sold (COGS). Net Profit = Gross Profit - Operating Expenses - Interest - Taxes. A business can post strong gross profit and still lose money at the net level, usually because operating expenses crept up while gross margin stayed flat and nobody was watching that particular gap.
COGS covers the direct costs of producing or purchasing what you sold: raw materials, direct labor, manufacturing overhead, and the wholesale price for resellers. It does not include rent, marketing, management salaries, or any other overhead. The line separating COGS from operating expenses is where most accounting arguments begin.
From gross profit, subtract operating expenses (rent, salaries, utilities, marketing, depreciation), then interest on debt, then income taxes. What remains is net profit. The IRS will want a portion of that, which is why accountants call it the bottom line rather than anything more cheerful.
| Revenue | $1,000,000 |
| COGS | $600,000 |
| Gross Profit | $400,000 (40% margin) |
| Operating Expenses | $250,000 |
| Interest | $20,000 |
| Taxes | $30,000 |
| Net Profit | $100,000 (10% margin) |
Gross margin shows whether your pricing and sourcing are working. Net margin shows whether the whole business model works. A high gross margin with a thin or negative net margin usually points to overhead that has outgrown revenue, not a pricing problem. Tracking both tells you where profit is being made and where it leaks out before reaching the bottom line.
Profit margin, break-even, markup, ROI and contractor calculators. No account required.
Gross profit is revenue minus COGS, the direct cost of what you sold. Net profit is gross profit minus everything else: operating expenses, interest, and taxes. Gross profit shows how well you price and source. Net profit shows whether the full business model holds up once the rent, salaries, and tax bill are in the picture.
Marginal profit is the additional profit from one more unit sold. It equals the selling price minus that unit's variable cost, which is also called the contribution margin. As long as marginal profit is positive, selling more volume increases total profit. When it turns negative, you're subsidizing each additional sale.
It depends on the industry. Software and SaaS companies typically run 70 to 85% gross margins. Manufacturing lands around 25 to 40%. Retail averages 25 to 50%. Restaurants often look impressive at 60 to 70% gross margin on food, then lose most of it to labor, which is why restaurant net margins average 3 to 9%. Compare your number to your own sector, not some generic benchmark.
Net profit is what remains after subtracting all costs from revenue: COGS, operating expenses, interest, and taxes. It is the most complete measure of whether the business actually works. The amount flows to the owner as earnings or stays in the company as retained earnings. Accountants call it the bottom line because it literally appears at the bottom of the income statement.
Jessica covers consumer money: the loans, the premiums, and the footnotes. She reads the disclosures so you can keep your weekend, fueled by cold brew and a deep distrust of any rate quoted without an asterisk.
