Gross profit vs net profit: Key differences
Understand how gross and net profit differ so you can price smarter and control costs.
Written by Ebony-Storm Halladay — Freelance accounting copywriter, 10 years. Read Ebony's full bio
Published Thursday 2 July 2026
Table of contents
Key takeaways
- Gross profit shows what you earn after direct costs, while net profit reveals what remains after all business expenses are deducted.
- Apply simple formulas to calculate both figures, then use margins to compare performance across periods and products.
- Lift gross profit by pricing well and managing cost of goods sold; lift net profit by reducing overheads and cutting waste.
- Track both figures regularly to make faster decisions on pricing, costs, and growth.
What is the difference between gross profit and net profit?
Gross profit is the revenue left after subtracting direct production costs, while net profit is what remains after deducting every business expense. The key difference is scope: gross profit measures product-level profitability, and net profit measures overall business profitability.
Gross profit and net profit are important metrics for understanding how your business is performing.
You've probably seen gross profit and net profit written on your profit and loss statement before. Gross profit is the amount of money left over when you subtract the direct costs that go into your products or services from your total revenue. Direct costs are often referred to as cost of goods sold (COGS) or cost of sales (COS), and can include things like inventory, staff wages, or delivery services. Gross profit tells you how profitable your products or services are.
It can also help you understand how efficiently resources are used to provide a customer with your product or service.
Net profit, on the other hand, shows overall business profitability. Net profit is sometimes referred to as the bottom line; it's what's left when you factor in the full scope of business costs. This includes COGS or COS, operational costs like utility bills and marketing fees, and any other costs your business incurs, like interest or tax.
Net profit gives you an overarching view of your business's profitability, not just the profitability of your products or services. For this reason, working out your net profit can help you spot business-wide inefficiencies and pinpoint where your profit margin gets squeezed.
How to calculate gross profit and net profit
Before doing any calculations, you'll need to gather accurate records of your business transactions. You also need to decide on the period you're planning to calculate gross or net profit for. You could work out your gross or net profit for the month, quarter, or year.
Calculating profit margins is simple when you use a formula. Here are the formulas for gross and net profit.
Gross profit formula
The formula for gross profit is straightforward:
- Gross profit: total revenue - cost of goods sold = gross profit
Here's an example. A freelance illustrator who sells children's colouring books wants to work out their gross profit for the month. Their total revenue for the last 30 days is £1,500.
To make the colouring books, they have to design them, pay for manufacturing, and buy packaging to ship them to customers. The cost of goods sold for the last 30 days is £500. This means their gross profit is £1,000 (£1,500 - £500 = £1,000).
Net profit formula
The formula for net profit accounts for all business expenses:
- Net profit: total revenue - (cost of goods sold + operating expenses + all other expenses) = net profit
Here's an example. A baker running a small bakery wants to work out how profitable their business has been for the month. Their total revenue for the last 30 days is £12,000.
To make pastries, they need ingredients, as well as a small team of staff in the shop. The cost of goods sold for the last 30 days is £4,000.
They also pay rent for the bakery premises, utility bills for their ovens and equipment, and marketing costs. The operating expenses are £6,000. They're also paying interest back on a business loan, so under the other expenses category, they've paid out £500. So, the calculation is £12,000 - (£4,000 + £6,000 + £500) = £1,500 net profit.
Gross profit margin vs net profit margin
Knowing your gross profit margin and net profit margin can help you make better financial decisions for your business. Your gross profit margin will tell you how profitable your products or services are, whereas your net profit margin will tell you how profitable the overall business is.
There are reasons to check both metrics. Gross profit helps if you want to understand whether your prices are set at the best rate, and net profit helps you understand if the business itself is financially sustainable.
Calculating your margin only takes one extra step after you've worked out gross and net profit. The profitability ratios are:
- Gross profit margin: gross profit / revenue x 100
- Net profit margin: net profit / revenue x 100
Let's apply these profit margin formulas to the examples from before. The freelance illustrator selling colouring books has a gross profit of £1,000. Divided by their total revenue of £1,500, this equals 0.66. Multiplied by 100, this equals 66.6, making their gross profit margin 66.6%.
While there's no perfect number to aim for, every business owner needs a gross profit margin that allows them to cover operational costs and other costs not factored into this calculation. A gross profit margin of 66.6% should enable the freelance illustrator to cover these costs and continue running a business.
Now for net profit. The baker previously calculated a net profit of £1,500. Divided by the revenue figure of £12,000, this leaves 0.125. Multiplied by 100, the baker gets a net profit margin of 12.5%.
Because all costs are included in the calculation, this 12.5% is free for the baker to spend as they please, whether that's paying themselves, reinvesting into the business, or setting aside as a buffer for less profitable times.
The net profit margin is always going to be lower than the gross margin, because operating costs and other expenses are factored into the calculation. If your gross profit margin is very high and your net profit margin is very low, it could be a sign your operating expenses need to be controlled more effectively.
For UK small businesses, profitability data from the Office for National Statistics shows that margins vary widely by sector. As of Q2 2024, the average profit margin for UK small businesses stood at 8.8%. If your net profit margin consistently sits below that figure, it's worth reviewing your cost structure to find where savings could strengthen your bottom line.
How you can improve gross profit and net profit
Once you've calculated your profit figures, you can start looking for ways to improve them. The strategies differ depending on whether you're targeting gross profit or net profit.
Tips to improve gross profit
To improve gross profit, you either need to focus on revenue generation or the cost of goods sold. Here are some tips:
- Revisit your pricing strategy and make sure you have an accurate figure for the cost of sales; if your costs increase, your prices may need to as well.
- Renegotiate with long-term suppliers to see if you can get a better deal for bulk purchasing or extended contracts.
- If you sell services, keep an eye on scope creep. Clear client contracts and detailed invoices can help you avoid spiralling workloads without extra pay.
- Refocus on marketing, particularly for products with better margins or things that aren't selling as frequently.
- Try bundling your products or services to see if you can bump up the customer's average spend with your business.
Tips to improve net profit
And here are some ideas for improving your net profit:
- Re-evaluate how you're using your business premises. Utilities and rent can be huge expenses, and flexible remote working arrangements could be positive for your staff and save you money on office space.
- Keep an eye on discretionary spending, particularly non-essential travel and entertainment costs, which can slowly add up.
- Consider automating manual admin tasks and other busy work that keep your teams from the jobs that make a difference to your bottom line.
- Track marketing spend to make sure it's delivering a return on your investment, and not just draining cash flow.
- Check your subscriptions regularly to make sure you're actually using the tools and services you're paying for.
Track profit in real time with Xero
A static financial report shows you a snapshot of your profitability. Modern accounting software like Xero can give you a continuous live view of your business performance, so you're always the first to know what's happening with your finances. Use and customise the dashboard to show the metrics that matter most to your business, like cash flow, invoices due, and your favourite financial reports.
FAQs on gross profit and net profit
Here are answers to common questions about gross and net profit for UK business owners.
Does gross profit include VAT in the UK?
No, VAT isn't included in gross profit calculations. VAT-registered businesses should use VAT-exclusive revenue figures when working out gross profit. HMRC's VAT guidance has more on how VAT applies to your business transactions.
Is net profit the same as net income?
Yes, net profit and net income mean the same thing in business accounting. For employed individuals, net income (or net pay) refers to take-home pay after tax and other deductions.
Can a business have a high gross profit but low net profit?
Yes, and it's more common than you might think. A high gross profit margin with a low net profit margin usually signals that operating expenses, such as rent, utilities, or marketing, are eating into your earnings. Reviewing your operating expenses line by line can help you find where to cut back.
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