11 Jan 2023
4 min read

Business profitability : Net profit vs. gross profit

difference-between-net-profit-and-gross-profit
Quick summary

As a CFO or finance leader, you're more than familiar with sales revenue, gross profit, and net profit. But do you have an easy way to figure each of them out for your business, especially compared to what you spend?

Table of Contents

    The basics: Profitability is an essential measure of a company's performance and is used to rate and assess its performance and success. There's more than one way to measure profitability, and you should calculate the actual amount of money coming in and going out by looking at two different numbers: gross profit and net profit.

    Net and gross profit are two critical metrics to keep in mind when running a business, and understanding how you're doing is vital for good business decision-making.

    The difference between net and gross profit

    The difference between gross profit and net profit is that gross profit is the revenue received from a sale minus the cost of goods sold (COGS). In contrast, net profit is gross profit minus operating expenses, interest expense, tax expense, and depreciation.

    In other words, gross profit is left over after deducting your COGS from sales revenue. Net income (or net loss) is what's left after all the other costs are deducted from sales revenue.

    You can calculate net profit and gross profit with the help of an income statement. The income statement is a financial document that shows how much money your business made or lost over a specific period. It tells you how much cash is coming in and going out, which gives you a better idea of how well your company is doing.

    The income statement is one of the three primary financial statements (along with the balance sheet and statement of cash flows), so it's important to understand what it shows.

    HBR report: how to drive business strategy and growth

    Report accurate business metrics using spend management software

    Shockingly, many businesses don't know how much they spend on various categories. Assuming your company falls into this category, then you're likely making business decisions with only half the necessary information. You don't know what you're spending money on, so you won't know if you're making a decent profit or not.

    The best way to combat this lack of transparency is to track your expenses using spend management software. Spend management solutions (which should include corporate Visa cards, expense management software, and AP) provide accurate reports that help reveal each spend category's net and gross profit. Which the right solution in place, you can even customise your spend categories and see the total amount spent on each category in real time so that you can track trends to see where your business is heading.

    At Payhawk, our spend management software allows companies to see their company spend (even across different entities) in one place so they can quickly spot where they can make savings. In addition, it allows businesses to track their spending across departments, so they know exactly where money is spent, who spends it, and what they spend it on with tools like smart company cards and invoice processing.

    All-in-one spend management helps large and growing businesses keep track of profits even with complex spend policies and many cardholders. The visibility within the solution lets companies evaluate their business profits and gives them a clearer picture of how their spending affects their current and future cash flows.

    Your key takeaways

    Profitability is one of the most critical metrics for any company to track. A company with high profitability can demonstrate that it's making enough money to cover its expenses and maintain its operations effectively, allowing it to invest more toward future growth and expansion plans.

    With a smart spend management solution for your SMB or Enterprise-sized business, you can see your spending in real-time and analyse your business profits as frequently as you need. This up-to-the-minute visibility provides a more accurate picture of your business's financial health than other manual methods and means you can say goodbye to erroneous spreadsheets and worn-out receipts. See ya.

    Every business is looking to maximise its profits. But many companies need help understanding their net and gross profit margins and how to influence them. In many cases, they could achieve this by using a spend management solution that provides reliable and accurate reports on their crucial business metrics. From tracking net and gross profit to managing team budgets, Payhawk's spend management software can help businesses develop accurate real-time reports on their business operations to monitor and influence business productivity and growth.

    Learn how Payhawk's spend management software can help your company's financial performance by controlling costs more effectively. Book a demo today.

    Trish Toovey - Content Director at Payhawk - The financial system of tomorrow
    Trish Toovey
    Senior Content Manager
    LinkedIn

    Trish Toovey works across the UK and US markets to craft content at Payhawk. Covering anything from ad copy to video scripting, Trish leans on a super varied background in copy and content creation for the finance, fashion, and travel industries.

    See all articles by Trish →
    4 Mar 2024

    Loading...

    4 Mar 2024

    Loading...

    4 Mar 2024

    Loading...