The primary difference is which costs have been deducted. Gross profit deducts only the direct costs of producing or delivering what you sold. Net profit deducts everything else as well — overheads, staff costs, interest, depreciation and tax. Gross profit measures trading efficiency; net profit measures whether the whole business made money.
Put another way, gross profit answers “does what we sell make money?” and net profit answers “does the business make money?” You can have a strong gross profit and still make a net loss if overheads or financing costs are too high for the volume you trade at.
That is why the two figures are best read together. A falling gross margin usually points to pricing or supplier costs. A stable gross margin alongside a falling net margin usually points to overheads or borrowing costs rising faster than sales.
Lenders typically review both when assessing an application, together with cash flow, because the combination shows whether trading is sound and whether there is enough headroom to service repayments.
CW Asset Finance is an independent credit broker in Tadcaster, North Yorkshire, serving West Yorkshire, North Yorkshire and the wider UK, with a panel of 60+ lenders. We are an Appointed Representative of Rural Finance Limited (FRN 630701), which is authorised and regulated by the Financial Conduct Authority, and a member of the NACFB. We are not accountants — for anything touching the treatment of figures in your accounts, please speak to your accountant.