What distinguishes gross from net profit?

Economists distinguish two types of profits — gross and net. What are the specifics of each of them? What distinguishes gross from net profit?

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What is gross profit?

Under the gross profit is commonly understood as the margin between income and costs of the company arising upon the sale by the company of all kinds of goods and services, and generate revenue at the expense of non-operating transactions. It should be noted that the structure of costs in this case are not included transaction costs — those associated with payment for lease of premises, fuel, transfer license fees. All of them can be significant, therefore, the amount of gross profit does not always reflect the actual profitability of the business. Important are only those costs that reflect the cost of production of goods or provision of services.

However based on the size of this indicator is determined by the efficiency of the business model of the enterprise. That is, if the firm manages to reduce costs without compromising the quality of the produced goods and rendered services, and also without reducing the level of social support for employees, and maintain turnover — gross profit will increase and this will be evidence of the efficiency of business management.

Note that the cost of production may be calculated according to different principles in different fields. In trading will apply some criteria in the production — other.

What determines the size of the gross profit? Economists distinguish 2 groups of factors influencing this indicator:

  • managed;
  • unmanaged.

The former include those for which the owners and managers of a firm are able to influence directly. On the effectiveness of their work depends, what will be the intensity of the impact factors on the business processes, as well as what will be the size of the gross profit of the company.

Factors referred to include:

  • the pace of receipt by the company of revenue that is determined by the dynamics of brand promotion on the market, effectiveness of sales strategies;
  • the quality and range of goods;
  • the effectiveness of modernization in order to increase the release of goods;
  • reduce costs on factory lines;
  • the effectiveness of personnel management in the enterprise.

The factors of the second type (to which the owners of the firm and its managers to influence, generally, can’t) should include:

  • the capacity of the market;
  • the geographical location of the firm (affecting, in particular, on the availability of transport communication, energy resources if site, is peculiar to warm or, conversely, cold climate);
  • foreign economic, political factors.

to contents ↑What is net profit?

Under the net profit is taken to mean a portion of the gross profits net of taxes and other obligations of the company to the budget. The amount corresponds to the value of this index, a company owner can use at their discretion — for example, to direct on modernization of production. But he most likely will pay staff salaries — which would be done in the first place. Sometimes at the expense of net profit the increase in working capital of the firm.

The value of this indicator depends primarily on gross profit. In addition, the net profit is affected by:

  • the tax regime in which the company operates;
  • the staffing structure and personnel policies to attract outsourced under contracts;
  • the effectiveness of accounting and tax accounting in the company — if it is high, then the firm will be able to avoid overpayments in the budget and in a timely manner to use deductions, guaranteed by law;
  • public policy in the regulation of taxes and fees.

Thus, the net profit is influenced by those factors that are controllable and those that cannot influence the owners and managers of the firm.

to contents ↑the Difference between gross and net profit

The main difference between the gross profit from net in that the first structure are not taken into account taxes and fees. Otherwise, the considered indicators are the same. On the basis of gross profit by deducting from its taxes and fees — amounts to pure profit. The factors that influence the value of the first indicator that indirectly determine the size of the second. Which, in turn, depends on the influence of several specific factors.

Having considered the difference between gross and net income, we x the conclusions in the table.

to content ↑Comparative table

Gross profit
Net profit

What is common between them?

Net profit is calculated on the basis of gross and indirectly depends on the factors affecting it

Calculated without taking into account operating expenses

What is the difference between them?

Corresponds to the difference between the revenues of the firm and expenses that reflect the cost of goods
Corresponds to the difference between the gross profit and cash transfers to the budget — in the form of taxes, fees and other payments established by law

Reflects the efficiency of the business model
Reflects the effectiveness of the accounting and tax accounting

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