Gross profit vs net profit for a food business

Gross profit is what is left from your sales after paying for what went into the products you sold: ingredients, packaging and waste. Net profit is what is left after you also take off everything else: kitchen rent, stall fees, fuel, card fees, insurance and your own pay. Gross profit tells you whether your products make money. Net profit tells you whether your business makes money. You can have a healthy gross profit and a net profit close to zero, and that is usually the surprise the first time you run the numbers.

The two formulas

• Gross profit = sales − cost of goods sold
• Net profit = gross profit − operating expenses − taxes

Each one has a margin, always measured against sales:

• Gross margin = gross profit ÷ sales
• Net margin = net profit ÷ sales

Use sales without sales tax. If your prices include tax, part of every sale is money you are holding for the government, and it is not revenue. Check your local tax rules or ask an accountant how that works where you sell.

What goes into cost of goods sold

Cost of goods sold is what you spent on the products that actually left your kitchen that month. For a small food business it is usually:

• Ingredients for what you sold
• Packaging: jars, lids, boxes, labels, bags
• Waste: what spoiled, burned or did not sell

If you pay a helper per batch, that goes here too. Your own time is better kept as a pay line in operating expenses, so you can see it on its own.

One detail matters: it is what you sold, not what you bought. If you bought a 25 kg sack of oats in March that will last three months, only the part you used belongs in March. Otherwise a month with a big stock-up looks terrible and the next one looks wonderful.

What goes into operating expenses

Everything you pay to keep the business running that is not in cost of goods sold:

• Commercial kitchen hours, or the share of home costs you use
• Market stall fees
• Card fees and delivery app commissions
• Fuel and your own deliveries
• Phone, website, advertising
• Insurance and accountant
• Your own pay

That last one is the line most people skip. If you cook, shop, sell and deliver, that work has a price. The guide on how to pay yourself from a food business shows how to put a number on it. Without it, net profit is not profit. It is your wages and your profit mixed together, and you cannot tell how much is which.

Worked example: a month of brownies and granola

You sell brownies and granola at a weekend farmers market, to two cafés and through a delivery app. These are your numbers for October, before sales tax.

Sales for the month: $6,200

Cost of goods sold:

Gross profit: 6,200 − 2,500 = $3,700

Gross margin: 3,700 ÷ 6,200 = 59.7%

So far this looks great. Almost 60 cents of every sales dollar is left after paying for what went into the product.

Operating expenses:

Net profit before tax: 3,700 − 3,440 = $260

Net margin before tax: 260 ÷ 6,200 = 4.2%

Income tax comes after that, and how much depends on where you are and how you are set up. Check your local tax rules or ask an accountant.

What each number tells you

A 59.7% gross margin and a 4.2% net margin come from the same business in the same month. There is no contradiction. Gross profit measures your products; net profit measures everything it takes to sell them.

If you had left out your own pay, net profit would have been 260 + 1,800 = $2,060, a 33.2% margin. You would have believed the business earns $2,060 on top of your work, when it actually earns $260 on top of paying you $1,800.

Each figure points to a different question:

• Low gross margin: the problem is the product. Price too low, recipe too expensive, too much waste. Look at the cost and price of each product.
• Good gross margin, low net margin: the problem is the structure. Too many fixed costs for your sales, high commissions, or not enough volume. You fix it by selling more with the same costs, cutting costs, or moving sales to cheaper channels.
• Positive net profit but no money in the account: that is a timing problem, not a profit problem. The guide on why you can be profitable and still have no money covers it.

To judge whether your margin is enough, do not compare it with a figure you read somewhere. Work out the one your business needs, as explained in what margin is good for a small food business.

What you need to run this every month

Three lists at the end of the month: what you sold, what you used to make it, and what you paid to operate. If you keep your receipts and record each day's sales, it takes half an hour. The guide to bookkeeping basics covers what to record and what you can skip.

Do it every month, always with the same rules. One month says little; three or four in a row show you whether net margin is rising, falling or flat. To see how this fits with the other profitability tests, per product, per hour and per channel, read how to know if your product is profitable.

Do it with the calculator

Put each recipe into the food cost calculator to get its cost per unit, then multiply by the units you sold in the month and you have your cost of goods sold without guessing.