Difference Between Gross Profit & Net Profit | HRMantra

Difference Between Gross Profit & Net Profit | HRMantra

 5-6 minutes 

Gross profit is the money you are left with after all production or manufacturing expenses. Net profit is what you are left with after deducting all business operational expenses from the gross profit. To work out net profit, you must calculate gross profit.

Every company, regardless of type and size, checks on records in trying to know how things are going. Employers from all businesses would want a healthy bottom line; however, hope is just not good enough. One must understand clearly how much their profit is by being able to differentiate gross from net profit.

Many people interpret gross and net profits as one. If you too are thinking so, then let us tell you this is not the case at all.

Let''s delve more into the concepts of gross and net profit.

What is Gross Profit?

The amount of money earned by a business after deduction of all costs of production and selling its goods or services is referred to as gross profit.

Computing gross profit is easy. You simply deduct COGS, or cost of goods that have been sold, from your total sales.

When you calculate total sales, be sure to count everything sold during a fiscal period, except for sales of fixed assets – for example, a building or equipment.

The Significance of Gross Profit

GP is a way to determine how effectively you are using your employees and resources to transform raw materials into products or provide services to customers. In other words, this figure tells you how your business is profitable and how your business is positioned in terms of financial health.

What is Net Profit?

Net profit refers to the number arrived at by deducting all the operating, interest, and tax expenses for a given period. Of course, this is the total amount of money your business has generated. Note, you can never be in a position to compute net profit without knowing your gross profit. Meanwhile, it is often referred to as a net loss if the value of net profit is less than 2.

Importance of Net Profit

Another index that indicates the health of your business—quite financially—is the net profit. It reflects whether a company is in the capacity to make more money than it spends.

You can use your net profit to figure out when/how to grow your business and when/how to cut costs.

If you are a business owner, then you must know the difference between profit and profitability. Money made minus money spent, or simply put, profit. Then again profitability is referred to as the ratio that equates to the percentage between profit and revenues.

Net Profit shows the amount of money your business is making. Thus knowing about it can benefit the business in several ways.

You should report your net profit on most tax and government forms. Your net profit will be what banks and other financial institutions will make a decision to loan you money. It will generally be a line item on company tax forms. Your lenders and investors also use your business'' net profit to determine if you have the ability to pay future bills.

Why Do You Need to Understand the Difference Between Gross Profit and Net Profit?

Gross profit simply doesn''t tell as much to your clients about what''s happening with your business and the cash you have available that net profit does. A person looking to invest in your business will, therefore, want to be able to review your net profit as part of their analysis of whether it would make sense to invest their money in that business.

Gross profit can help you work out how to reduce your costs of good sold or increase the prices of your products. That is because, if your gross profit is lower than your net profit, then you have to look for a way of cutting down on costs.

An income statement indicating the financial performance of your business would actually necessitate a proper presentation between gross profit and net profit. If you do not know the difference, then your financial papers might be wrong and give an unrealistic picture of your business.

Nonce!

That''s all you need to know about gross and net profit.

These profits and several other key elements can be calculated using HRMantra. HRMantra is one such easy-peasy HR software that has made calculations such as payroll and other key business calculations faster and accurate for all HR professionals. Experience excellence; try HRMantra today!

FAQs

1. What does gross profit reveal about a company''s financial performance?

A gross profit is a way to determine if a business is using their employees and supplies in a proper way to provide products or services to its clientele. The number can also be used to validate the profitability and the current financial health of a business.

2. What role do taxes play in determining net profit?

Net income is the amount of money a person or business makes once taxes, deductions, and other costs are taken out. With respect to business, net income is what the company has after it settles all costs, such as taxes, salaries, etc.

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