This is a question I get asked A LOT…in fact…It’s a question I get asked daily! haha so I thought the best thing to do would be to write a quick blog just outlining the key differences between ‘gross profit’ and ‘net profit’ so you’ll always know.
Firstly we need to establish your overall income. You’ll need to know how much has been paid into your business in order to establish your gross and net profit. So if you have that then read on!
Your GROSS profit is quite simply your total income minus your ‘cost of sales’. That’s it – simple!
So you have your overall income for the year, let’s say it’s £50,000 for the sake of this blog. In this example you made £50,000 and your ‘cost of sales’ was £10,000 – so your gross profit is £40,000.
“But what are ‘cost of sales'” I hear some of you ask! Well these are costs which you incurred to physically produce your goods. So if you’re a manufacturer of your own goods then this will include materials, labor costs to produce the goods and any other direct costs associated with the production of your goods. If you’re more a retailer, then these will be the costs associated with buying your goods. If you provide a service then this will include any cost associated with the direct labor cost or salaries of the employees to make that service happen.
‘Cost of sales’ do not include any indirect costs associated with your production, purchase or supply of goods/services such as distribution, administration, marketing etc etc.
Your NET profit is then any money you have left after you deduct all the expenses it costs to run your business (including your ‘cost of sales’ which you’ve already calculated to get your gross profit). So here you will deduct everything and anything it costs you to run your business…and I mean everything! So we’re talking about any cost you incur to ensure your business can run such as utility bills, rent, car costs, distribution, marketing, salaries etc etc (for a full list of expenses please see our other blog here – https://zlogg.co.uk/tax-return-expense-categories-explained/) So in simple it’s your income minus ALL your business outgoings.
So again let’s use the £50,000 annual income as the example. You made £50,000 and it cost you a total of £30,000 to actually run your business – your net profit is £20,000.
It’s honestly that simple! So just to quickly recap:
Gross Profit = Your total income minus your ‘cost of sales’
Net Profit = Your total income minus your total business outgoings.