What is the difference between gross profit and net profit?

The distinction between gross profit and net profit is fundamental in understanding a business's financial performance. Gross profit is calculated by subtracting the cost of goods sold (COGS) from total revenue, reflecting the company's ability to sell its products above the direct costs associated with producing them. This figure does not take into account other operating expenses such as salaries, rent, utilities, or taxes.

Net profit, on the other hand, is derived from gross profit by subtracting all other operating expenses, interest, and taxes. Consequently, net profit provides a more comprehensive view of a company's overall profitability after all expenses have been accounted for.

Understanding this difference is crucial for business owners and managers because gross profit helps in assessing pricing strategies and production efficiency, while net profit is essential for evaluating the overall financial health and sustainability of a business.