Gross profit
Gross profit is revenue minus the direct cost of what you sold. Direct costs include the materials in a product, the labor to make it, or the subcontractor you paid to deliver a service. Say you earn $200,000 and those direct costs are $120,000. Gross profit is $80,000.
Gross margin expresses that as a percent of revenue, here 40%. It shows how much of each sales dollar is left to cover everything else.
Net profit
Net profit is what remains after all expenses, including rent, software, wages not tied to a specific sale, insurance, interest and, depending on how you present it, taxes. If the example business has $60,000 of those operating expenses, net profit before tax is $20,000.
Net margin is net profit divided by revenue, here 10%. It shows how much of each sales dollar the business keeps.
Why you need both
A healthy gross profit with a weak net profit points to overhead that is too high. A weak gross profit points to pricing or direct costs. The fix for each is different, so looking only at net profit can send you in the wrong direction.
Tracking gross margin by product or service also shows which ones pay for themselves and which only look busy.
Where to find them
On the profit and loss statement, gross profit appears after cost of goods sold and net profit appears at the bottom. If your report does not show gross profit, your direct costs may not be separated from other expenses. Setting up a cost of goods sold account fixes that.
Be consistent about what counts as a direct cost. Moving a cost between categories changes your gross margin without changing your real profit.
Using the numbers
Use gross margin to set prices and judge discounts, since a discount comes straight out of gross profit. Use net profit to judge the business as a whole and to plan taxes and owner pay.
Compare both across months and against last year. A margin calculator helps you test what a price change would do before you make it.
An example of the difference
Two shops each have $100,000 in revenue and $20,000 of net profit. The first earns a 60% gross margin and spends heavily on rent and staff. The second earns a 30% gross margin and runs lean.
The first can improve by trimming overhead. The second needs better pricing or cheaper supply, because there is little room in the margin. The same bottom line hides two different problems, and the right fix depends on which one you have.
Common questions
Is net profit the same as take-home pay?
No. Owners are often paid through draws or salary, and taxes, loan principal and savings affect what you actually keep.
Can gross profit be high while net profit is negative?
Yes. If overhead is larger than gross profit, the business loses money despite healthy margins on sales.
Which matters more?
Both. Gross profit tells you about pricing and direct costs, and net profit tells you about the whole business.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.