Gross profit and net profit are both measures of how much money your business is making, but they measure it at different points in your profit and loss account, and they tell you very different things about your business.
Understanding the difference is fundamental to reading your accounts, setting prices, and controlling costs.
What is Gross Profit?
Gross profit is your revenue minus the direct costs of producing your goods or services. These direct costs are called the Cost of Goods Sold (COGS) or Cost of Sales.
The gross profit formula is:
| Gross Profit = Revenue − Cost of Goods Sold (COGS) Cost of Goods Sold includes raw materials, direct labour, and any costs directly tied to making your product or delivering your service. |
| 📊 Example A clothing retailer buys dresses wholesale for £15 each and sells them for £45 each. On 1,000 dresses: • Revenue: £45,000 • COGS: £15,000 • Gross Profit: £30,000 • Gross Profit Margin: 66.7% |
What is Net Profit?
Net profit is what remains after you’ve deducted all costs from your revenue, including both direct costs (COGS) and indirect costs like rent, salaries, insurance, marketing, software subscriptions, and tax.
It’s often called the ‘bottom line’, because it appears at the bottom of the profit and loss account after everything has been subtracted.
Net profit formula:
| Net Profit = Gross Profit − Operating Expenses − Interest − Tax Operating expenses (also called overheads) are the costs of running the business that are not directly tied to production: rent, admin staff, utilities, marketing, accountancy fees, etc. |
| 📊 Example Continuing the clothing retailer example: • Gross Profit: £30,000 • Less: Staff wages: £12,000 • Less: Rent and utilities: £5,500 • Less: Marketing: £1,200 • Less: Accountancy and software: £800 • Less: Corporation tax: £2,625 • Net Profit: £7,875 • Net Profit Margin: 17.5% |
Why Does the Difference Matter?
Gross profit tells you whether your core product or service is financially viable. If your gross margin is very thin, you have limited room to cover overheads and still make a profit.
Net profit tells you whether the whole business, including the cost of running it, is financially sustainable.
A business can have an excellent gross margin but poor net profit if its overheads are too high. This is common when businesses grow quickly and acquire costs (bigger premises, more staff) that outpace revenue growth.
What is Profit Margin?
Profit margin expresses profit as a percentage of revenue:
- Gross profit margin = (Gross profit ÷ Revenue) × 100
- Net profit margin = (Net profit ÷ Revenue) × 100
Margins allow you to compare profitability across different time periods or against competitors, regardless of the absolute size of the business.
| UK Small Business Benchmarks: Average UK small business gross profit margins vary significantly: retail 30–50%, professional services 60–80%, manufacturing 25–45%, restaurants 60–70% (food cost). Net margins for healthy SMEs typically sit between 10–20%. |
Frequently Asked Questions
No. Gross profit can never exceed revenue, as it is calculated by subtracting costs from revenue. If your cost of goods sold is zero (some service businesses have minimal direct costs), gross profit equals revenue.
Not exactly. As a sole trader, your net profit is what you’re taxed on via Self Assessment. But your actual take-home will also depend on whether you’ve drawn money from the business throughout the year and any personal tax allowances you’re entitled to.
Both matter, but for different purposes. Investors and lenders often focus on gross margin as a measure of the core business model’s efficiency. Net profit matters most when assessing whether the overall business is viable and sustainable.
