It is important to understand the difference between gross and net income, especially if you own a business. These two numbers are two parts of your company’s profitability. Continue reading to learn how to tell the difference between gross and net income.

**What Is Gross Income?**

The gross income of a business is the difference between how much money it made and the cost of the products it sold. It doesn’t factor in any other expenses, so it doesn’t tell you the true profit margin, but it is a good measure of whether you are charging enough for your products and whether you are selling enough. It doesn’t include any salaries, office costs, or other important expenses.

**What Is Net Income?**

The net income tells you what your actual profits are. You take the revenues and subtract all of the expenses of the company. This includes everything right down to petty cash. The end number will either show a profit or a loss. This is important in determining how profitable your company is.

It won’t let you know the margin, such as how much was spent on goods and how much on salaries, but it will tell you if your company had gains or losses.

While this is an important number, it doesn’t tell the whole picture. You need to know more than the simple outcome, including the profit margin and other numbers. Getting all of the details is the best way to evaluate and make changes to improve your company.

**How Do You Calculate Gross Profit Margin and the Net Profit Margin?**

People use the numbers from their business to calculate different profitability ratios. There are two that are significant, which are the net profit margin and the gross profit margin.

The gross profit margin is also called the return on sales. You can take the revenue, subtract the cost of the products and services you sold, and divide it by the revenue. In other words, you take the gross profit and divide it by the revenue.

If you want to calculate the net profit margin, you take the net income and divide it by the revenue. When you have this information, you can look at operating costs and see where they stand. You can determine whether you need to scale back, or you might have room to spend more. You can use this information to make decisions about your business and how to improve it.