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What Is the Difference Between Gross Profit and Net Profit?
What Is the Difference Between Gross Profit and Net Profit?
Gross profit tells you how much is left after paying the direct cost of delivering what you sell. Net profit tells you what remains after the wider costs of running the business have been paid.
Both figures matter. The problem is that many established business owners look at one when they need the other.
In this second article in our Know Your Numbers series, we will explain the difference in plain English, using UK accounting terminology and figures shown excluding VAT.
If you have not read the first article, start with our explanation of break-even analysis. Break-even tells you how much you need to sell before the business covers its costs. Gross profit and net profit then show you what happens to the money after those sales have been made. You can find the wider series in the Verve Creative Knowledge Centre.
The simple difference between gross profit and net profit
The difference comes down to which costs you subtract.
Gross profit = revenue minus cost of sales
Cost of sales includes the costs directly connected to producing or delivering what you sell. Depending on your business, that could include stock, materials, subcontractors, direct delivery wages, packaging, freight inwards or production costs.
Net profit = gross profit minus overheads and other operating costs
Overheads are the costs of keeping the business operating, whether or not you make a particular sale. They might include office salaries, rent, insurance, software, marketing, administration, professional fees and general utilities.
In formal accounts, you may also see operating profit, profit before tax and profit after tax shown separately. For this article, we use net profit to mean the money left after cost of sales and operating overheads have been deducted. Your accountant can help you reconcile this with the exact headings used in your accounts.
Why owners confuse the two
Gross profit often appears earlier in a profit and loss account, and it can look reassuring. The sales figure may be growing, and the gross profit may be substantial. However, that does not mean the business is keeping a substantial amount.
For example, a business might generate £60,000 of gross profit but spend £65,000 on salaries, rent, marketing, software and administration. It has made a gross profit, but it has made a net loss.
The opposite problem also occurs. An owner sees a healthy net profit at the end of the year and assumes that every product, service or client is profitable. That may not be true. Strong sales in one high-margin area may be hiding weak pricing or excessive delivery costs elsewhere.
Gross profit is about the economics of what you sell. Net profit is about the economics of the whole business.
Worked UK example: from revenue to net profit
Let us use one simple example. All figures below are excluding VAT. For a VAT-registered business, VAT charged to customers is not revenue and recoverable input VAT is not normally an operating cost in the profit and loss account.
| Line | Amount |
|---|---|
| Revenue | £100,000 |
| Cost of sales | £40,000 |
| Gross profit | £60,000 |
| Overheads | £30,000 |
| Net profit | £30,000 |
The calculations are:
Gross profit = £100,000 revenue – £40,000 cost of sales = £60,000
Net profit = £60,000 gross profit – £30,000 overheads = £30,000
The gross profit margin is 60%:
£60,000 gross profit ÷ £100,000 revenue × 100 = 60%
The net profit margin is 30%:
£30,000 net profit ÷ £100,000 revenue × 100 = 30%
The business is keeping 30p of every £1 of revenue after the costs included in this example. The important point is that the £60,000 gross profit is not available to spend freely. £30,000 of it is required to pay the overheads.
Why gross profit is the sharper measure of what you actually sell
Gross profit gives you a clearer view of the commercial engine behind each product, service, project or client.
If revenue increases but gross profit does not increase at the same rate, you may have a pricing or delivery problem. You could be winning more work while earning less from every sale.
Gross profit helps you ask practical questions:
- Are we charging enough for the work involved?
- Which products or services generate the strongest gross margin?
- Are supplier, material or subcontractor costs increasing?
- Are discounts reducing the contribution from each sale?
- Are we spending too much delivery time on low-value work?
This is why gross profit is often the sharper measure of what you actually sell. It strips away the wider running costs and shows whether the core offer works before overheads are applied.
For guidance on reviewing prices, see Raising Prices Without Losing Customers.
Why net profit is what you keep
Net profit tells you whether the business model works as a whole.
You might have an attractive product with a strong gross margin, but if the business needs too many employees, too much office space, excessive software or expensive marketing to sell it, the net profit may still be disappointing.
Net profit is the number that helps you assess whether the business can:
- Pay the owner properly.
- Fund investment and growth.
- Build a cash buffer.
- Repay borrowing.
- Withstand rising costs or a quieter sales period.
- Provide a worthwhile return for the risk and effort involved.
This is also why growing revenue is not automatically the answer. If every extra pound of sales brings proportionately more delivery cost, discounting or administration, the business may become busier without becoming more profitable.
B2B and D2C examples
The difference between gross profit and net profit applies to both B2B and D2C businesses, but the cost structure often looks different.
| B2B service business | D2C product business |
|---|---|
| Revenue from consultancy projects: £100,000 | Online product revenue: £100,000 |
| Direct delivery staff and subcontractors: £40,000 | Stock, packaging and fulfilment: £55,000 |
| Gross profit: £60,000 | Gross profit: £45,000 |
| Overheads: £45,000 | Overheads, advertising and platform costs: £35,000 |
| Net profit: £15,000 | Net profit: £10,000 |
These are illustrative figures, not industry benchmarks. The B2B business has a stronger gross margin, but its specialist delivery team creates a significant overhead burden. The D2C business has a lower gross margin because physical products and fulfilment absorb more of the sale, while advertising and platform costs then reduce net profit further.
For the B2B owner, the key question may be whether projects are priced correctly and whether delivery is consuming too many senior hours. For the D2C owner, it may be whether product costs, returns, shipping, discounts and acquisition costs leave enough margin to support growth.
Where gross profit can mislead you
Gross profit is useful, but it is not perfect.
It can mislead you when:
- Direct and indirect costs have been classified inconsistently.
- Owner time is not included in the cost of delivering the service.
- Stock has not been accounted for correctly.
- Returns, discounts, delivery charges or payment fees are omitted.
- A high-margin offer takes so much time that it limits capacity elsewhere.
A service business may report an impressive gross margin because the owner’s delivery time is not treated as a direct cost. The margin looks strong, but the business may not be profitable if the owner had to be replaced at a market rate.
Where net profit can mislead you
Net profit can also hide useful detail.
A profitable month may be caused by a one-off project, delayed spending or an unusually large sale. A weak month may reflect a planned investment in staff, equipment or marketing rather than a broken business model.
Net profit can also conceal which parts of the business are performing well. If profitable services are subsidising low-margin work, the overall figure may look acceptable until cash becomes tight.
Track both numbers monthly, and where possible, review gross profit by product, service, client type or sales channel. Then compare the trend rather than reacting to one isolated month.
What to do about it: Automate, Delegate, Eliminate
Once you understand where gross profit and net profit are being created or lost, use a simple three-part review.
Automate repeatable work that does not require judgement. This could include payment reminders, reporting, lead responses, appointment scheduling or routine customer communications.
Delegate work that needs to be done but does not need to be done by you. If the owner is still preparing every quote, chasing every enquiry and handling every administrative task, overhead may be appearing as owner stress rather than as a clear line on the accounts.
Eliminate activity that produces little value. Review low-margin services, unnecessary subscriptions, unprofitable customers, excessive discounts and meetings that do not move work forward.
This approach also applies to sales. Before spending more on lead generation, review what happens to the opportunities you already have. Our article You Don’t Need More Leads. You Need a Better Follow Up explains how slow responses and inconsistent follow-up can waste potential revenue.
Your practical next steps
- Take your latest management accounts or profit and loss report.
- Confirm that revenue and costs are shown excluding VAT where appropriate.
- Separate cost of sales from overheads.
- Calculate gross profit and gross margin.
- Calculate net profit and net margin.
- Review the figures by service, product, client or channel.
- Choose one cost to automate, one responsibility to delegate and one activity to eliminate.
- Review the numbers again next month.
Knowing your gross profit tells you whether what you sell works. Knowing your net profit tells you whether the business as a whole works.
You need both numbers to make confident decisions about pricing, staffing, marketing and growth. If you want practical help connecting your numbers to your marketing and sales activity, explore Verve Creative’s strategic coaching and marketing and sales system support for owner-run businesses.