Gross profit and profit margin sound very similar, yet they are very different and serve distinct purposes for analyzing your business.

Gross profit is found by taking the net sales minus the cost of goods sold. For example, to find gross profit, a dressmaker make add up all of the receipts for the dresses sold, then subtract the cost of the fabric, thread, thimbles, the wages paid to a junior dressmaker who helped sew the dresses. The result is the amount of profit made only considering direct costs, i.e., gross profit. To convert the dollar amount into a percentage, take the gross profit divided by net sales, and multiplying by 100. While you can compare your result to other companies in your industry, it is generally difficult to accurately compare across companies using this calculation, so this is often done as an internal measure to see how the business is doing from year to year. Compare this ratio to the same month of the prior year or the previous month to spot any significant trends.

Net profit are the earnings remaining after you have accounted for all expenses, including depreciation and taxes. Net profit margin is found by taking the net profits (which is the profit after taxes have been paid) divided by revenue, multiplied by 100. Net profit can be used to compare your results to other companies within your industry. Since all items have been accounted in calculating the net profit margin, it allows for more comparability to the industry standard or your competitors.

Ratios provide a great means for measuring and monitoring business performance. These are just two of the many ratios that might be applicable to your business.