The differences between net and gross profit (and how to calculate them)

The differences between net and gross profit (and how to calculate them) image

To understand the financial health of your business, you need to focus on two types of profits in particular — net and gross. Because without a clear picture of the financial health of your business, you’re operating blindly, and that means you can’t make informed decisions about the future.

Gross profit (also known as gross income) is the profit a company makes after deducting production costs, and net profit (known as net income) is the profit you have left over after deducting all expenses — insurance, taxes, wages etc.

So if you’ve come across both terms before but never really understood the difference between the two, this blog is for you. Read on to learn more about each type of profit and how you can calculate them for your business.

How to calculate net vs gross profit

What is gross profit?

Gross profit, operating profit, if you’re in the manufacturing industry, is the figure you get when you remove production costs from your revenue. Gross profit or gross income, helps you understand the costs of labour and production for your business, which will help indicate whether you’re operating at a loss.

If you’re operating at a loss, you’ll want to focus on reducing production costs and improving efficiencies in the production process.

How to calculate gross profit

To calculate gross profit, you’ll need to remember this formula:

Gross profit = revenue - cost of goods sold (COGS)

If you operate a service business, you’ll subtract the time it’s taken you to deliver the service from your revenue, and if you operate a product business, you’ll subtract the cost of production. Costs can include labour, raw materials, and overheads from factory production.

Gross profit example:

Let's say your revenue is £40,000, but the cost of goods sold (COGS) comes out at £30,000. Your gross profit would be £10,000.

Keeping on top of this metric means that from month to month, you can clearly pinpoint when gross profit drops, which might highlight the need to make changes, perhaps improving efficiencies or raising the price of goods.

Gross Profit Calculator

£ .00
£ .00

Include direct costs like labour, raw materials & overheads.

Your results

Gross Profit


Gross Profit Margin


This calculator is intended for illustration purposes only.

What is net profit?

Net income, simply known as the ‘bottom line’ is the figure you arrive at when you’ve subtracted all your expenses. This figure helps business owners understand the true profitability of their organisation.

You can generate thousands of pounds in revenue, but if your outgoings are high, your net profit becomes smaller (or negative, known as a net loss), which indicates that your business might need some optimising to maximise profits. You can maximise profits by making staff cuts, for example, or comparing business energy deals to reduce costs.

How to calculate net income

You can’t work out your net income without first knowing your gross profit. In simple terms, to get your net income subtract operational expenses from your gross profit:

Net income = total revenue – total expenses

This financial analysis helps you get a clearer picture of how your business is performing as time goes on.

Measuring net income means you can identify problems as the months progress. Giving you the chance to closely analyse your expenses, making changes for the better.

Net income example:

Let’s say your revenue is £550,000 for the accounting period. To get the net profit you need to subtract all your expenses from your gross profit — employee wages, office premises, professional subscriptions, computer costs etc. If all your expenses total £400,000, your net profit for the year would be £150,000.

Net profit is a crucial part of understanding the financial health of your business, particularly if you’re looking to secure investors to help grow your business. Investors will look at your net profit to determine whether investing in your business is a good move or one best to avoid.

Net Profit Calculator

£ .00
£ .00

Include direct costs like labour, raw materials & overheads.

£ .00

Include all expenses like insurance, taxes and wages.

Your results

Net Profit


Net Profit Margin


This calculator is intended for illustration purposes only.

Looking to save money on your business finance? You’ve come to the right place. Use our free comparison tool to compare the best lender deals.

About the author

Helen Jackson Author
Written by Helen Jackson | January 02, 2024

Money Writer

Helen has over nine years of experience in content writing and writes financial content for us here at Capalona.

Updated: January 02, 2024
Published: November 04, 2022

Share this guide?

Related articles