Gross Profit vs Net Profit

This month I will like to share some basic information about financial terms that every business owner should know. My desire is to share accounting and financial tips to the aspiring entrepreneur and even the business owner that’s been in business for a little while. Maybe you are good at creating sales but poor at managing your cash. This information is for you. I will like to explain the difference between Gross profit and Net income. Many of us know the difference between gross and net based off our paychecks we received from working for someone. It is very similar in business.

First thing first.

Let’s talk about revenue. Revenue is you total income. Your income consist of your sales. What are sales? The money you receive from products or services. Now, some products require for you to purchase other material to create the product or sell the product. I always use books as an example, because I am currently writing a book ( Financial Finesse Coming soon). However, let’s use a different type of inventory. Let’s use  oil or a body butter. I personally do not know how to make a body cream but I know you have ingredients, you have labels, you have a container to put the product in. These things are called Cost of Goods Sold ( COGS).

So, if the product cost $25.00 and your COGS cost $15.00 your Gross Profit is $10.00. So the equation is Revenue (Sales) - COGS (Material) = Gross Profit.

Now, as a business you still have other expenses like your operating expenses such as rent, internet, subscriptions, marketing fee’s, website cost etc. So the equation is then Gross Profit - Expenses ( rent, subscriptions etc) = Net Profit

In short, gross profit is the profit of sales less the material used to make the sale. Your net income is your Gross Profit less all administrative or operational expenses.

If you do not have direct cost to create a product then you will only have Revenue and Net income. Which is simply revenue less your expenses.

As a business owner these are terms you should know and understand. You are ultimately responsible for your financial records. Remember all businesses have Financial statements. If you will like a list of financial terms to help you better understand your financial statements click here and download 21 financial terms all business owners should know.