Part of our roles as lifetime accountants is to keep you — whether you’re a client of ours or not — as informed as humanly possible about the intricacies of managing your finances. In last week’s blog, we explained the difference between profit and cash. Now, we’d like to dig a little deeper and explain the difference between gross profit versus net profit.
So just to recap, profit is the financial gain a business acquires after expenses are subtracted from revenue. But if you want to better understand a company’s profitability, you need to know the difference between gross profit and net profit.
So let’s start with a simple vocabulary lesson:
Gross profit is sales revenues minus the cost of goods sold.
That means gross profit is the difference between revenue and the direct cost of making a product or providing a service, before deducting taxes, overhead, the cost of paying employees, and interest payments.
Net profit is basically the bottom line. In a nutshell, it’s the money left over after paying all the expenses of an endeavor — the amount left over after all deductions are made. Once the net value is attained, nothing further is subtracted. And it’s not allowed to be made lower.
So in conclusion: Gross income is calculated by subtracting the cost of goods sold from revenue. Net income is calculated by subtracting expenses such as SG&A (selling, general and administrative expenses), interest payments and taxes from gross income.
If you have any questions about how these dynamics work and how a Broussard Poché CPA can help you navigate your financial matters, give us a call.