Gross Profit:

Revenue minus Cost of Goods Sold (COGS)

Shows profit before operating expenses

Formula: Revenue – COGS = Gross Profit

Example: Sell product for $100, costs $40 to produce = $60 gross profit

Net Profit:

Gross profit minus all operating expenses (rent, salaries, marketing, etc.)

Shows actual bottom-line profit

Formula: Gross Profit – Operating Expenses = Net Profit

Example: $60 gross profit – $45 operating expenses = $15 net profit

Why both matter:

Gross profit margin shows pricing effectiveness and production efficiency. If gross margin is too low, you need to raise prices or reduce production costs.

Net profit margin shows overall business profitability. If gross margin is good but net margin is poor, operating expenses are too high.

Healthy margins:

– Gross margin: 50-70% for service businesses, 30-50% for retail/product

– Net margin: 10-20% is generally healthy for most small businesses