You may be making sales—but are you really making money?

A business owner I met at a trade expo said:

I asked if that 35% was gross or net.

He paused.

This is common.

Many small and medium business (SMB) owners assume profit is one number.

But gross profit and net profit tell very different stories—and misreading them can lead to dangerous decisions.

Let’s break down the difference and where most SMBs get it wrong.

Step 1: Know the Basic Definitions

Gross Profit = Sales – Direct Costs (COGS)

• Direct costs include: raw materials, manufacturing costs, packaging, freight (if borne by you), etc.

• Gross profit tells you: Is the product itself profitable?

Net Profit = Gross Profit – All Expenses

• Includes: salaries, rent, electricity, marketing, admin, interest, depreciation, taxes

• Net profit tells you: Is the business as a whole profitable?

If gross profit is strong but net profit is weak—you may have an operational cost issue.

If both are weak—you may have a pricing or product viability issue.

Step 2: Where Most SMBs Go Wrong

1. Mistaking Revenue for Profit

But after:

• ₹14L in materials and fulfilment

• ₹3L in salaries and rent

• ₹1.5L in GST and advance tax...

Net profit = near zero.

Sales are vanity. Profit is reality.

2. Not Including Founder Salary or Rent

Founders often skip their own compensation in P&L:

This inflates net profit artificially. Always include:

• Notional salary for founders

• Rent, if using personal property

• Any reimbursements taken in cash

This gives you a realistic profit view—not an emotional one.

3. Ignoring One-Time or Non-Cash Expenses

Many ignore:

• Depreciation

• Annual renewals billed once (insurance, AMC)

• Tax provisions or delayed payments

Result?

Profit looks high for a few months, then suddenly drops.

Consistency only comes when you spread and forecast properly.

Step 3: Use Gross Profit to Make Pricing Decisions

Your gross profit margin helps you answer:

Benchmark:

• 40–60% GP for product businesses (after raw materials + delivery)

• 60–80% GP for services (after direct labour/tech/tools)

If you’re under this range, either:

• Your pricing is too low

• Your input costs are out of control

• You're discounting too much without cutting cost

No amount of scale will fix a broken gross margin.

Step 4: Use Net Profit to Plan Tax, Growth, and Salaries

Your net profit decides:

• Whether you can afford to expand

• What your real tax liability is

• If your salary bills are sustainable

• Whether you can pay bonuses, EMIs, or dividend

It’s also what your bankers, investors, and auditors will look at.

If you're making ₹3 crore in revenue but ₹0 net profit,

you don't have a scale problem—you have a structure problem.

Step 5: Build a Monthly Profit Snapshot for Clarity

Simple tracker every month:

Seeing this every 30 days tells you what changed and why—before it’s too late to fix it.

TL;DR – Too Long; Didn’t Read

• Gross profit = profit on your product/service

• Net profit = profit after all expenses, including salaries, rent, taxes

• Don't confuse sales with profit—track both clearly

• Use gross profit to fix pricing; use net profit to plan growth

• Track monthly for clarity and quick course correction

Your P&L isn’t just a compliance document.

It’s your business’s health report.

Understand it. Question it. Use it.

Because what you think is profit might just be performance on paper.