When running your own business, you need to understand what the words ‘net’ and ‘gross’ mean to determine your company’s financial health. 

This guide will focus on what ‘net’ means in financial terms and cover the following topics:

  • The definition of ‘net’
  • The difference between gross and net
  • Examples of net amounts and what they mean
  • How to calculate these net amounts

What does ‘net’ mean in financial terms?

The term ‘net’ refers to the amount that’s left over after you deduct expenses, taxes, and other liabilities (sums you have to pay). Your net amount is the lowest number you can get, meaning you only reach your net point once you’ve subtracted everything you need to dedicate money to.

What’s the difference between gross and net?

In the simplest terms, ‘gross’ refers to the whole amount of something before making any deductions. For example, your gross income is what you make before paying taxes and other deductibles. Therefore, your net income is the sum you have left after paying your taxes and other financial obligations. 

Looking at another example, gross weight of goods is the total weight of the goods and its packaging, whereas net weight is only the weight of the goods. 

What are some examples of net amounts in business?

Net items will regularly appear in all kinds of financial documents. In this section, we’ve listed the main net amounts you’ll need to understand to run your business effectively.

Net assets

The net assets represent your company’s total asset value, calculated by subtracting liabilities from total assets. 

Assets are valuable items your business owns and come in two categories: current assets (to be sold within a year) and fixed assets (to be kept for more than a year). Liabilities refer to everything your company owes, now and in the future, such as money that you owe to suppliers and unpaid invoices.

Net assets express the difference between what an entity owns and what it owes. If your business has positive net assets, it may be financially healthy. On the other hand, if your net assets are in the negative, you likely have financial problems.

The formula for calculating total net assets is as follows:

Net assets = (Total Fixed Assets + Total Current Assets) – (Total Current Liabilities + Total Long Term Liabilities)

Net revenue

Net revenue (also known as net sales) refers to the money a company makes from sales (revenue) minus any discounts and returns. Sometimes, net revenue is also called ‘the real top like’ because it shows a business’ sales revenue minus discounts, returns, and cost of sales (explained below). 

The formula for calculating net revenue is:

Net revenue = Gross revenue – Cost of sales

What does ‘cost of sales’ mean?

Also referred to as the cost of goods sold (COGS), cost of sales refers to the direct costs related to creating products or services. Cost of sales focuses only on the manufacturing expenses, ignoring the selling, general and administrative (SG&A) expenses and interest expenses (charges for borrowing money). 

Put simply, cost of sales tracks your ability to produce or deliver goods and services at a reasonable cost.

Net profit

Net profit (also known as net income or net earnings) is the money you make after paying all of your expenses. Your net profit figure can be negative, meaning your expenses are larger than your income. Negative net profits are common for new businesses and can last until their second year of trading. 

Below is a simple formula to use:

Net profit = total income – total expenses

Net profit margin

Net profit margin is the net profit your business makes expressed as a percentage. You first need to calculate your net profit for a given period of time (usually a week or month). You do this by combining all of your expenses during this time (cost of goods, other expenses, taxes, and debt) subtracting them from your total income that period, as shown below:

Net profit = total income – total expenses

Next, take your net profit and divide it again by your total income, then multiply by 100.

Net profit margin = Net profit ÷ Total income × 100

Net profit margins are useful when comparing profits from different periods, such as month to month). Net profit margins are also helpful when scaling up your business, and for comparing investment and expenses across time. You can use your net profit margin to plan specific expenses and compare more recent investment strategies to old ones. 

Net cash flow

General cash flow measures how much money your business brings in (inflows) and spends (outflows) during a given time. Your net cash flow shows how much money the company made during that time. 

Net cash flow is the sum of your inflows minus your outflows. A positive net cash flow means your business makes more than it spends. On the flip side, negative net cash flow means your company spends more than it creates. While negative cash flow is fine here and there, consistently generating it means your business could eventually run out of money.

Here’s how to work out your net cash flow:

Net cash flow = Total cash inflows – Total cash outflows

Now that you have a clear view of what ‘net’ means in financial terms, we hope you’ll feel confident to manage your accounts and grow your business. 

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