Understanding how your business earns—and keeps—money is fundamental to financial success. You can look at gross income and net income to gauge business profitability. But what is the difference between net income vs. gross income? And why does it matter for your business?
Let’s break it down so you can confidently navigate your company’s financial statements and grow sustainably.
Net income vs. gross income [Chart]
Your profit and loss statement (or income statement) shows you your business’s gross and net income. Understanding the difference between net vs. gross income is key to accurately reading this financial statement and making business decisions.
Gross income shows your company’s revenue after subtracting your cost of goods sold, or COGS.
Net income shows you how much your business earns after deducting total expenses.
| Gross Income (Gross Profit) | Net Income (Net Profit) | |
|---|---|---|
| Definition | Gross income shows your income after subtracting COGS. | Net income shows your income after subtracting all expenses. |
| Formula | Gross Income = Revenue – COGS | Net Income = Gross Income – Expenses |
| Purpose | Identify where you can reduce costs or raise pricing to maintain profitability. | Assess your company’s profitability after accounting for all expenses. |
| Where to Use | Profit and loss statement | Profit and loss statement |
What is gross income?
Gross income, or gross profit, is the income your business generates from sales after subtracting the COGS. It provides a snapshot of how efficiently your business produces or delivers its goods and services.
To find gross income, you need to know your business’s revenue and COGS:
- Revenue: All sales earned before any expenses.
- COGS: Direct costs tied to production, such as materials, labor, and manufacturing overhead.
Use the following formula to calculate gross income:
Gross Income = Revenue – Cost of Goods Sold (COGS)
Say your business brings in $700,000 in revenue and the COGS is $300,000. Your gross income would be:
$700,000 (revenue) – $300,000 (COGS) = $400,000 (gross income)
Why gross income matters
Gross income is a key indicator of your business’s production efficiency and pricing strategy. When you know your gross income, you can answer questions like:
- Am I pricing my products high enough to cover direct costs?
- Are my production or purchasing costs rising?
- Does my gross income fluctuate, or is it consistent?
Analyzing gross income trends helps you identify where to reduce costs or raise pricing to maintain profitability.
What is net income?
Net income, or net profit, shows you how much your business has earned after deducting all expenses. It can be a negative or positive number and is also known as your bottom line because it’s the final line of your profit and loss statement.
To find net income, you need to know your business’s total expenses, such as:
- COGS
- Operating expenses (e.g., rent, utilities, payroll for non-production employees)
- Interest
- Taxes
Use the following formula to calculate net income:
Net Income = Gross Income – Total Expenses
Say your gross income is $300,000, and your total operating and other expenses amount to $220,000. Your net income would be:
$300,000 (gross income) – $220,000 (operating and other expenses)= $80,000 (net income)
Why net income matters
Net income tells you whether your business is profitable after paying all expenses. It’s also what most stakeholders—owners, investors, and banks—use to assess your business’s financial health.
Finding your net income helps you:
- Assess the true profitability of your business
- Prepare for tax obligations
- Determine dividends or retained earnings
- Make investment or cost-cutting decisions
Net income and gross income FAQs
Many new and experienced business owners use these two terms interchangeably. Let’s clarify some common points of confusion:
Net income is calculated after deducting taxes.
No. This number reflects your sales, not your income. Your gross income comes after subtracting the cost of goods or services sold. Your net income comes after all other expenses.
Gross income doesn’t factor in all of your business expenses. Using gross income to make financial decisions can lead to overspending. Use net income when planning how to pay yourself from your business.
Increasing gross income is a positive sign, but rising gross income can be misleading if your expenses are also rising.
Make sure you are aware of all costs, as expenses could shrink your final net profit or even end in a loss.
When do you need to know your gross and net income?
You may need to pull your gross and net income numbers for the following:
- Investor reports: Gross profit trends reveal product viability, while net profit shows long-term sustainability.
- Loan applications: Lenders assess net profit to determine your business’s ability to repay loans.
- Budget planning: Knowing both figures helps you set realistic budgets and growth targets.
- Tax filings: Net income is crucial for calculating business income taxes.
How to improve gross and net income
A slight increase in gross income can result in a significantly higher net profit, especially if your overhead costs don’t change.
Here are ways to boost each type of income:
| Tips to Improve Gross Income | Tips to Improve Net Income |
|---|---|
| Negotiate better rates with vendors | Cut back on non-essential expenses |
| Increase pricing | Find ways to lower interest and tax bills |
| Streamline production | Improve operational efficiency (e.g., automation) |
How accounting software can help
Tracking gross and net income accurately requires organized accounting systems. To minimize errors and maximize efficiency, consider using accounting software over manual spreadsheets.
Accounting software can:
- Generate financial reports (e.g., income statements)
- Track expenses in real time
- Separate COGS from other expenses
- Give you real data for budget planning and forecasting
Patriot software can simplify the process and offer visual dashboards to follow income trends.
Net vs. gross income: Wrapping up
Gross income and net income each tell a different but equally important story about your business. Gross income shows how well your products or services are doing, while net income reveals your actual profitability after all expenses.
By understanding the difference between net income vs. gross income, you can:
- Make smarter pricing and production decisions
- Accurately evaluate your business’s financial health
- Confidently present financials to lenders and investors
- Ensure your business is growing sustainably—not just in sales, but in profits
Ready to take control of your business finances? Start by using Patriot’s accounting software to track both gross and net income, generate profit and loss statements, and more. The clearer your financial picture, the better your decisions—and the brighter your business’s future.
This is not intended as legal advice; for more information, please click here.
