Updated
Gross profit = revenue − cost of goods sold
Net profit = gross profit − operating expenses + other income − other expenses − applicable entity income tax
Profit margin % = specified profit ÷ revenue × 100 (revenue must be nonzero)
Examples use made-up numbers. Education only, not tax, legal or investment advice.
Example
The setup
Example company: Ridgeline Builders Co. (fictional).
Illustrative example.
Existing fictional Ridgeline annual model: revenue $2,000,000; COGS $1,500,000 (materials $520,000, subs $300,000, field labor $620,000, equipment $60,000).
Gross profit is $500,000, or 25%.
Office labor $198,000 plus other overhead $182,000 leaves $120,000, or 6%, BEFORE owner compensation, interest and income taxes not modeled.
Do not label that $120,000 fully burdened after-tax net income.
Your next step
What would change your next decision after you check this against your own records?
Educational content, not tax, legal, accounting or investment advice.
Questions owners ask
Can gross profit be positive while net profit is negative?
Yes. Overhead, financing costs and other expenses can exceed gross profit. Gross margin alone does not show the whole business result.
Is Ridgeline’s $120,000 available for the owner to spend?
Not automatically. The model omits owner compensation, interest and income taxes, while receivables, debt payments and working capital also affect spendable cash.
Does an owner’s draw reduce net profit?
For a sole proprietor, a personal withdrawal is not a business expense. Salary treatment differs by entity; deductible payroll already included in expenses does reduce the relevant profit measure.