“Net sales” and “gross profit” are similar–but not identical–concepts in business economics. Like the similar phrases “gross profit margin” and “net profit,” both of which can easily become confused with either of the other two, they’re different ways of measuring the influx of money into a company. Identifying the separate values allows business accountants to pinpoint what’s working and what isn’t with the structure and strategy of a business.
“Net sales” is the total monetary value of everything a company has sold in a given period–the amount of money brought into the company through sales. The math is simple multiplication: if a company sells a million shirts at PKR 10 a shirt, its net sales are 10 million rupees. Sales are also sometimes called “revenue.”
“Gross profit” is what’s left of the income from sales after the cost of manufacturing or purchasing the items is subtracted. If, in the above example, each shirt had cost the company PKR 2, its gross profit would be PKR 10 million in sales – PKR 2 million in costs = PKR 8 million gross profit.
Gross Profit Margin
When gross profit is expressed as a percentage of net sales, it’s called the “gross profit margin.” Continuing our example, the gross profit margin of the t-shirt company would be 80 percent, since PKR 8 million is 80 percent of PKR 10 million. With this figure, business owners and accountants can gauge the efficiency of their manufacturing and sales efforts.
In addition to being distinct from net sales, gross profit is also not the same thing as “net profit,” which is a measurement of the amount of money taken in by a company after all its expenses–not just the costs of goods, but the costs of advertising, distribution, infrastructure and employee salaries–have been deducted from its revenue.