A lot of business owners feel a bit silly asking this question, but it's something you should feel completely comfortable asking your bookkeeper or accountant:
What's the difference between gross profit and net profit?
Let's start at the beginning.
Turnover is simply the money you receive from your customers.
From this, you take away your cost of sales – the direct costs involved in delivering your product or service.
What's left is your gross profit (sometimes called your gross margin).
Gross profit shows how efficiently your business is producing or delivering what it sells.
It helps you understand whether your pricing is covering direct costs.
However, it doesn't take into account everything it costs to run your business day to day.
That's where overheads come in.
Overheads are the ongoing costs of running your business. These may include:
- Rent
- Insurance
- Software subscriptions
- Marketing
- Telephone and internet costs
- Wages and salaries
- Professional fees
Overheads are often split into two categories:
Fixed costs – costs that stay broadly the same each month, such as rent or insurance.
Variable costs – costs that fluctuate depending on activity, such as utilities, commissions or materials.
Once you've deducted all of those costs, you're left with your net profit.
This is your bottom-line figure and one of the most important indicators of how your business is performing.
You can be busy making sales and bringing money through the door, but still not be profitable if costs are quietly increasing or being overlooked.
For example, if suppliers increase prices and you don't review your own pricing, your margins can shrink without you noticing.
- Have I reviewed my supplier costs recently?
- Do my prices still provide a healthy gross margin?
- Could I negotiate better rates?
- Could I switch suppliers?
- Is there any waste or unnecessary spending I could reduce?
More sales doesn't always mean more profit.
You can be working flat out, fully booked and still not be as profitable as you think if costs are increasing or margins are being squeezed.
Understanding the difference between gross profit and net profit helps you make better business decisions, price correctly and keep your business financially healthy.
If you'd like help understanding your numbers or support keeping on top of your bookkeeping, get in touch with Books in Order.
Call or WhatsApp 07784 290949 or email hello@booksinorderhull.co.uk
We look forward to hearing from you!
