Gross Profit vs Net Profit: What Every Business Owner Needs to Know
A lot of business owners feel a bit silly asking this question, but it’s something you should feel completely comfortable asking your bookkeeper or accountant:
What’s the difference between gross profit and net profit?
Let’s start at the beginning.
Turnover
Turnover is simply the money you receive from your customers.
From this, you take away your cost of sales – the direct costs involved in delivering your product or service.
What’s left is your gross profit (sometimes called your gross margin).
Gross Profit
Gross profit shows how efficiently your business is producing or delivering what it sells.
But it doesn’t take into account everything it costs to actually run your business day-to-day.
That’s where overheads come in.
Overheads
Next, you take away your overheads – the costs of running your business. These may include rent, insurance, software subscriptions, marketing, wages, and other ongoing expenses.
Overheads are usually split into:
Fixed costs – costs that stay the same each month, such as rent or insurance.
Variable costs – costs that change depending on your activity, such as materials, commissions, or utilities.
Net Profit
Once you’ve deducted all of those costs, you’re left with your net profit.
This is your bottom-line figure and one of the most important indicators of how your business is really performing.
Why This Matters
Because here’s the thing, you can be busy, making sales and bringing money through the door, but if you’re not keeping an eye on your costs, you could be breaking even or worse making a loss.
For example, if your suppliers increase their prices, your cost of sales goes up. If you don’t review your own pricing, your gross profit can shrink without you even realising.
What Can You Do?
Here are a few simple questions to ask yourself:
Have I reviewed my supplier costs recently?
Do my prices still give me a healthy gross margin?
Could I negotiate better rates?
Could I switch suppliers?
Is there any waste or unnecessary spending I can reduce?
To Sum It Up
More sales doesn’t always mean more profit. You can be working flat out, fully booked, and bringing money in consistently… but still not actually be profitable if your costs are quietly increasing or your margins are being squeezed.
That’s why it’s so important to regularly step back and look at what’s really happening in your business, not just the sales coming in.
If you’d like support understanding your business finances a bit better, we can help. Get in touch.