Gross profit vs net profit: understanding the difference

Gross profit reveals what you earn after deducting the direct costs of producing your goods or services, while net profit shows your true bottom line after all business expenses are paid. Understanding how each works, and how to calculate them, helps you make better decisions for your business, spot where your business is under pressure and have more informed conversations with lenders, accountants and investors.

What is gross profit?

Gross profit is what's left from your revenue after you've subtracted the direct costs of producing or delivering your goods or services. It measures how efficiently your business generates income from its activity, before overheads and other costs come into the picture.

How to calculate gross profit

Calculating gross profit should be a regular part of your business reporting. Luckily, the gross profit formula is pretty straightforward.

The simple way to think about it is:

Gross profit = Revenue minus Cost of goods sold (COGS)

For product businesses, COGS covers things like materials, parts and the labour it takes to make your products. For service businesses, it’s usually called cost of sales and relates to the costs directly tied to delivering a service, like specialist tools or paying contractors.

Here's a simple example using a small UK retailer:

Revenue: £80,000

Cost of goods sold: £35,000

Gross profit: £45,000

That £45,000 is the money available to cover overheads, pay for growth and (eventually) generate a net profit.

What is a good gross profit margin?

What's "good" varies a lot by industry and the type of business you have. Often retail businesses might have slimmer margins than professional services or service-based providers.

A few examples to illustrate, from Xero, include: 

• SaaS and software: 70 to 85%

• Professional services: 50 to 70%

• Hospitality: 35 to 45%

• Retail grocery: 30 to 35%

• Construction: 15 to 25%

It’s worth noting that the most useful benchmark is your own business over time, and other - comparable - businesses in your industry.

What is net profit?

Net profit is the bottom line: what’s left after all costs have been deducted. That includes your operating expenses (rent, wages, utilities, marketing), interest on any debt and tax. 

The net profit formula is:

Net profit = Gross profit - Operating expenses - Interest - Tax

Net profit isn’t the same as cash flow. A business can show a healthy net profit while still facing cash flow pressure if payments are slow coming in or large costs are timed poorly.Using the same business:

How to calculate net profit

Using the same example from earlier, here’s how to calculate net profit:

Gross profit: £45,000

Operating expenses (rent, wages, utilities): £22,000

Interest on business loan: £1,500

Corporation tax: £4,500

Net profit: £17,000

This is the figure that shows the true overall profitability of the business once every cost has been accounted for.

What is a good net profit margin?

Again, a good net profit margin and what's healthy depends on the industry you operate in and your business type. Margins can vary, and a comparison against your own previous performance can be more useful than chasing an industry average.

Gross profit margin vs net profit margin

Both margins use the same revenue figure as the denominator, but they measure different things.

Gross profit margin tells you how efficiently your business produces or delivers its product or service. A falling gross margin usually signals rising production costs or pricing pressure.

Net profit margin shows the full picture: how much of every pound of revenue you actually keep after every cost is covered. It reflects the combined effect of your COGS, your overhead management and your financing decisions.

As mentioned above, this looks like:

Net profit = Gross profit - Operating expenses - Interest - Tax

Gross profit = Revenue minus Cost of goods sold (COGS)

Running both calculations together gives you a clearer view. If gross margin is healthy but net margin is squeezed, the issue likely sits in your overheads or financing costs rather than your core operations.

Why do gross profit and net profit both matter?

Tracking both figures matters because each one shows something the other doesn't.

Gross profit shows whether your core business model is working, whereas net profit shows whether the whole business is sustainable after every cost is factored in.

When filing your accounts, both figures appear on your profit and loss statement. Lenders, investors and accountants will look at both when assessing your business. A healthy gross profit with a thin net profit, for example, might mean taking a closer look at operating costs or debt levels.

One of the most direct ways to improve net profit is by reducing your operating costs, and that can be more straightforward than increasing revenue. This could mean investing in new equipment and technology, changing your sourcing to prioritise larger inventory orders or upskilling your team to help them be more productive.

If you’re looking to invest in the future of your business, Funding Circle offers a range of finance products tailored for small businesses. From term loans and cashback cards to flexible lines of credit and asset finance, we offer finance that back you, whatever your goals.  

FAQs

Is gross profit the same as revenue?

No. Revenue is the total income your business generates from sales before any costs are deducted. Gross profit is what's left after subtracting the direct costs of producing or delivering your product or service.

Can a business have a gross profit but still make a net loss?

A business can generate a healthy gross profit and still make a net loss if overheads, interest payments or tax are high enough to wipe it out. This is one of the reasons it's important to track both figures separately.

Does a business pay tax on gross or net profit?

Corporation tax in the UK is charged on net profit - your taxable profit after allowable deductions. You don't pay tax on gross profit.

What is the difference between gross profit and operating profit?

Operating profit (also called EBIT - earnings before interest and tax) sits between gross profit and net profit. It's calculated by subtracting operating expenses from gross profit, but before interest and tax are deducted. 

What is the difference between net profit and net income?

In UK business contexts, net profit and net income are sometimes used to mean the same thing - what's left after all costs, interest and tax. In some accounting frameworks, particularly US ones, there can be a distinction, but for most UK businesses they mean the same thing.

18/06/26: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial, tax or legal advice. Readers should seek independent tax advice from a qualified professional.To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.