The Difference Between Gross Profit and Net Income
Gross profit and net income. Two terms that you have most likely been told are important indicators of how your business is doing, but what do they actually mean? We briefly go over the definition of these two items and what they mean for your business.
Gross Profit is the amount of revenue left over after you subtract your direct costs from your earnings. Direct costs are things such as the cost of inventory, cost of labor for services, and materials that are used in the manufacturing of products. Direct costs could also include the direct labor that goes into making a product and the overhead for the manufacturing plant if costs are appropriately allocated to products.
Net income on the other hand looks at the final income of the business. It looks at what is left over from revenue after both direct and indirect costs have been paid for. Net income is the bottom line so to speak.
So which one is more important? They're both important to analyze and they both tell a slightly different story. If gross profit is negative or too low you know that either the direct costs are too high or your prices are too low. If gross profit is sitting at an acceptable number, but net income is too low the issue is with the indirect costs of the business. Indirect costs are often called overhead. These include expenses such as advertising, insurance, rent, etc.