Have you ever looked at your revenue and thought, “Wow, I made a lot this month!” only to wonder where all the money went? You’re not alone. Many business owners fall into the trap of thinking that a strong top line means a strong business. But the real story is told through your margins, specifically, gross profit and net profit.
Understanding the difference between these two numbers is one of the most important steps in taking control of your finances.
What Is Gross Profit?
Gross profit is your revenue minus your direct costs – the expenses that are directly tied to delivering your product or service.
If you’re a creative agency, that might mean freelancer labor or per-client software licenses. If you’re an accountant, it’s often the staff hours spent on client work. If you make granola, it’s the oats, honey, and packaging.
Let’s say you earned $10,000 this month. If it cost you $4,000 to deliver the work, your gross profit is $6,000. That means you’re keeping 60 cents of every dollar after covering your direct costs.
This middle-line number, often shown on your income statement as “Cost of Goods Sold” or “Cost of Services,” tells you how efficiently you’re producing your income.
What Is Net Profit?
Net profit, also known as the bottom line, is what’s left after subtracting all your operating expenses. That includes rent, software subscriptions, payroll, insurance, marketing, taxes, and other overhead.
Using our same example: if you have $6,000 in gross profit but $4,000 in overhead, your net profit is $2,000. That’s your true take-home number. And for most business owners, it’s the number that really determines whether your business is sustainable.
Why Both Margins Matter
Here’s the key insight: both gross and net profit margins matter – but they tell you different things.
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Gross profit tells you how efficiently you’re delivering your service.
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Net profit tells you whether your business can actually survive.
You could have a healthy gross margin and still be running a business that loses money if your overhead is too high. Conversely, improving your gross margin gives you more room to reinvest, compensate your team, or even pay yourself better as an owner.
How to Improve Your Margins
Here are three core levers to pull:
1. Raise Prices Strategically
Don’t let fear hold you back from charging what your services are worth. Costs rise over time, and pricing needs to keep pace. We’ve helped clients adopt pricing practices that not only preserve their margins but position them as premium providers.
2. Cut Unnecessary Expenses
Try a “Need to Have vs. Nice to Have” exercise. Often, we uncover forgotten subscriptions, bloated expenses, or outdated tools that can be eliminated immediately, freeing up cash without sacrificing performance.
3. Improve Operational Efficiency
Automate repetitive tasks, streamline workflows, and renegotiate vendor agreements. Small process improvements can reduce direct costs and create long-term lift in gross profit.
And above all, track your numbers regularly. What gets measured gets managed. If your margins are changing, you need to know – and you need to act.
Pitfalls to Avoid
Some of the most common traps we see:
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Confusing revenue with profitability. Big sales don’t mean big profits.
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Letting overhead go unchecked. Operational costs creep up unless intentionally reviewed.
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Failing to track or categorize expenses correctly. Poor data leads to poor decisions.
If you’re not clear on what you’re spending or why, your profit margins will suffer, no matter how good your sales are.
Final Thought
Revenue is just the top number. What really matters is what you keep. Gross and net profit margins are the two numbers that tell the truth about your business’s financial health.
If you want help making sense of your margins or improving profitability without adding stress, let’s talk. At Norman Professional Services, we believe small shifts in awareness can lead to big improvements in what you take home at the end of the day.
