Gross vs Net: What’s the Difference?

Understanding your gross and net income is an important element of managing your personal finances and running a successful business if you operate a small business or work for yourself. It may also assist you in making crucial decisions regarding your revenue, such as when to raise your rates, if certain costs are required, and the kind of revenue, projects, and clients you should be focused on.

Gross and net income might give a distinct viewpoint and influence your personal or corporate goals and actions. As a business, gross income may reflect money earned year over year and provide insight into how your company is performing.  On the other hand, net income will show you a somewhat different picture – how much you make after costs are deducted. Consider lowering certain expenditure if your net income is smaller than projected. 

Gross Profit vs Net Profit

When discussing business outcomes, the words “gross profit” and “net profit” are frequently used. In this section, we present a brief explanation of these terms, as well as gross profit margin and net profit margin, as they apply to small businesses. 

Gross profit

The cost of goods sold is the total of all costs involved in the creation of a product or service when it is sold. These costs include direct labour, materials, overhead, and other costs directly associated with creating and selling the product or service. To calculate gross profit, you can use the method below:

Gross Profit = Sales Revenue – Cost of Sales

In effect, gross profit (also called gross margin) is the sum of a product’s or service’s variable cost, such as materials and direct labour. In financial statements, it appears at the top of the income statement, after-sales and expenditures of sales. 

Though the statistic varies by industry, you should only use it to compare organisations in the same industry that provide similar products or services. This is owing to the fact that the cost of sales will vary greatly depending on the type of goods manufactured. 

Gross profit margin

It uses the same data but presents the results as a ratio, which is frequently referred to as the gross profit ratio. The following formula is used to calculate this figure:

Gross profit margin = (Sales Revenue – Cost of Good Sold)

Other costs, listed on the Profit & Loss Statement, have a part in determining a company’s success, but the higher the proportion, the better. Depending on what has been sold, a greater amount suggests that you are more lucrative. This amount, once again, will vary by industry.

Net profit

Net profit is one of the strongest indicators of a company’s performance. After all of your expenditures have been paid, your net profit is how much money you have remaining. Because higher sales do not necessarily equate to greater profitability, net profitability is an essential statistic for eCommerce and retail organisations to track. Your genuine bottom line, or how much money you’re left with at the end of the day, is determined by net profit. This signifies that your company is growing at a steady rate and that further expansion is likely. Growing companies can save for future expenditures, pay off debt, invest in new initiatives, goods, or employees, or transfer profits to investors.

Considering net profit is equivalent to the total revenue minus costs, calculating net profit is as simple as taking total income for an amount of time and subtracting total expenditure for the same timeframe. You can easily determine net profit using the method below:

Net Profit = Total Revenue – Total Expenses 

Net Profit Margin

The net profit margin is a statistic that informs you how much of each revenue dollar remains after expenditures are deducted. Net profit margin is calculated by dividing net profit (revenue minus all costs) by beginning revenue. Then, multiply the value by 100 to get your net profit margin as a percentage.

Net Profit Margin = Net Profit / Revenue x 100

Another way of calculating it:

Net Profit Margin = (Total Revenue – Total Expenses) / Revenue x 100 

Net Sales vs Gross Sales

Gross and net sales are frequently misunderstood and conflated. When measuring the quality of a company’s sales, net sales are more relevant than gross sales. Gross sales alone aren’t very useful since they exaggerate a company’s real revenues since they contain various additional variables that can’t be categorised as sales.

Net sales, on the other hand, is a more accurate depiction of a company’s revenues and may be used to determine a company’s genuine turnover as well as develop sales and marketing plans to boost future revenues. 

Gross sales are just the number of units sold multiplied by the price per unit sold. Because it does not include returns, allowances, or discounts, the gross sales figure is usually substantially larger. The net sales figure, which is determined after the factors are taken into account, is lower. Since non-sales income components are excluded, net sales are a more accurate depiction of the company’s throughput and sustainability, and it is used for decision-making. The gross sales formula is obvious. It goes like this:

Gross sales = sum of all sales 

The net sales formula is used to determine a company’s sales after subtracting returns, discounts, and other allowances. The formula for net sales is gross sales revenue minus returns, discounts, and allowances.

Net Sales = Gross Sales – Sales Return – Allowances – Discounts 

Gross Revenue vs Net Revenue

Gross revenue is converted to net revenue. The difference between gross income and the cost of goods sold is known as net revenue. Because it is the final line on an income statement and shows the residual earnings after accounting for company expenditures, net revenue is also known as the bottom line. Gross and net revenue may be combined to determine how well a firm is doing in terms of profits and expenditure.

The terms gross revenue and net revenue are frequently used interchangeably to describe a company’s financial health. Neither gross sales nor net revenue by itself are sufficient indicators of a company’s financial health. These measurements work best when combined. 

Gross revenue is basically the entire amount of money earned by a company from the sale of goods, services, or both. Unlike profit, it is calculated without any deductions. It is just the total of a company’s sales, huge or little.

Gross revenue is used by both corporations and small enterprises to assess their performance. It, like any other indicator, may be tracked over time, for instance, from one year to the next to determine if sales are rising or declining.

Gross Revenue = Total Revenue = Quantity Sold x Price. 

Gross Income vs Net Income

The sum of all revenues obtained from delivering services to clients before deductions, taxes, and other expenditures is referred to as gross income. Net income, on the other hand, is the profit attributable to a corporation or individual after all expenditures have been deducted. Net income is derived by deducting all business expenses, such as taxes, advertising expenditures, and interest charges, as well as any qualified deductions, such as professional and legal fees. If the net income is positive, the firm has made a profit; if it is negative, the firm has lost money. Whereas if the gap between gross profit and net income is substantial, it indicates that the company incurs a lot of expenditure. Under such circumstances, the company’s spending should be reviewed in order to eliminate needless expenditure and minimise required expenditure. Individual net income is defined as income generated after subtracting state and federal taxes, social security taxes, health insurance, and other expenses. 

Gross Income

Before any deductions or taxes, a person’s gross income is the whole amount of money they get in their paycheck. The amount reported on a pay stub after taxes and deductions is called net income. Unless there are no deductions and the individual is tax-free, net income will always be less than gross income. Pre-tax or before-tax income is another term for gross income.

The gross income of a full-time employee is equal to his or her annual pay or earnings before taxes. A full-time employee, on the other hand, may have additional sources of income that must be taken into account when assessing their earnings. A paycheck is the most common source of gross income, but it can also come from other places. Hourly earnings, salaries, commissions, and bonuses can all be included in a paycheck. 

Basic ways to calculate gross income is shown below:
Individual Gross Income Formula = Individual’s total income across all sources.

Business Gross Income Formula = Total Revenue – Cost of Sales

Net Income

After eliminating all business expenditures, net income is your company’s overall profit. Net income is also known as net earnings, net profit, or the bottom line of a firm. It’s the money you have leftover after paying shareholders, investing in new projects or equipment, paying off debts, or saving for the future. The following is the formula for computing net income: Net Income = Revenue – Cost of Goods Sold – Expenses 

Another formula for calculating net income is: Net Income = Gross Income – Expenses

If you wish to keep things simple, you may write the net income formula as:

Net Income = Total Revenues – Total Expenses

It is possible to have a positive or negative net income. You have a positive net income when your company’s sales exceed its costs. You have a negative net income, also known as a net loss if your total costs exceed your revenues. You may calculate your company’s net income for any time period using the method above: yearly, quarterly, or monthly, depending on your needs.