Gross profit and net profit are two of the most important metrics on your Profit & Loss statement, but they tell very different stories.
Gross Profit
What it is: Gross profit is the profit a company makes after deducting the costs directly associated with making and selling its products.
Formula: Gross Profit = Revenue - Cost of Goods Sold (COGS)
What it tells you: It measures how efficiently you are producing and pricing your products. A high gross profit margin means you have a healthy markup on your goods.
Net Profit (The 'Bottom Line')
What it is: Net profit is the amount of money left over after *all* business expenses have been deducted from your revenue.
Formula: Net Profit = Gross Profit - All Operating Expenses (like rent, salaries, marketing) - Taxes - Interest
What it tells you: This is the true measure of your business's overall profitability. It shows how much actual profit your business made after everything has been paid for.
A Simple Analogy
Imagine you sell a t-shirt. You bought it for 200. Your gross profit is 300.
But you also have to pay for your shop's rent (50) and your salary (100). After deducting these operating expenses, your net profit is 300 - 50 - 100 = 150.
A business can have a high gross profit but still have a low net profit (or even a loss) if its operating expenses are too high. An automated accounting system generates these numbers for you, giving you a clear view of your financial health.
