Gross profit vs net profit comes down to which costs you take off. Gross profit is your revenue minus the direct costs of doing the work (materials, subcontractors, cost of goods sold). Net profit is what is left after every other business expense as well, including vehicles, insurance, software, advertising and interest. An electrician who bills $180,000 ex GST with $72,000 of direct costs has a gross profit of $108,000 (a 60% gross margin), and after $34,000 of overheads and interest a net profit of $74,000 (a 41.1% net margin). In Australia, always work both figures out on GST-exclusive amounts.
Got GST-inclusive figures? Run them through the GST calculator to get the ex-GST amount before you work out profit. Pricing jobs for the first time? The tradie invoice template splits labour and materials into separate lines, which makes your direct costs much easier to track later.
What is the difference between gross profit and net profit?
Gross profit measures how much each sale earns after the costs that only exist because you made that sale. Net profit measures how much the whole business earns after every cost, including the ones you pay whether you work this week or not. One is about pricing and job costing; the other is about whether the business is worth running.
| Gross profit | Net profit | |
|---|---|---|
| Formula | Revenue − direct costs | Revenue − direct costs − overheads − interest (− tax for a company) |
| Where on the P&L | About a third of the way down | The bottom line |
| Answers | Are my prices high enough for this work? | Does the business make money overall? |
| Moves when you | Change prices, supplier costs, subcontractor rates, job mix | Change any of those, plus rent, vehicles, software, staff, borrowing |
| Margin version | Gross profit margin | Net profit margin |
How do you calculate gross profit?
Gross profit = revenue − cost of sales. Revenue is everything you invoiced for the period, excluding GST. Cost of sales (also called cost of goods sold, or direct costs) is what you spent delivering that specific work.
What counts as a direct cost?
A cost is direct if it rises and falls with the amount of work you do. Ask: if I took on no jobs this month, would I still pay it? If the answer is no, it is probably a direct cost.
- Trades: materials and parts for jobs, subcontractor labour, equipment hire for a specific job, tip fees, job-specific permits.
- Retail and online sellers: stock you sold (opening stock + purchases − closing stock), inbound freight, packaging.
- Consultants and agencies: freelancers or contractors you bring in for client work, software licences bought for one client, printing for a specific project.
Your own time is not a direct cost if you are a sole trader, because you cannot pay yourself a wage (more on that below). If you run a company, wages for staff who do the billable work can sit in cost of sales, while admin and office wages belong in overheads. Pick a rule and apply it the same way every year, or your margins will not be comparable.
How do you calculate net profit?
Net profit = gross profit − operating expenses − interest, and for a company, − income tax. Operating expenses (overheads) are costs that keep the business running regardless of how many jobs you do in a given week.
Typical overheads for a small Australian business include vehicle running costs, insurance, phone and internet, software subscriptions, accounting fees, advertising, licences and memberships, home office or rent, bank and merchant fees, and depreciation on tools and equipment. Interest on business loans is usually shown on its own line, which lets you see operating profit (sometimes called EBIT) before financing costs.
A common mistake is to treat the amount that landed in your bank account as profit. Bank balance includes GST you owe, money customers paid in advance and loan funds, and it excludes invoices that have not been paid yet. Profit comes from the P&L, not the bank statement. If cash is the real worry, read our guide to working capital as well.
What is the gross profit margin formula?
Gross profit margin = gross profit ÷ revenue × 100. Net profit margin = net profit ÷ revenue × 100. Margins turn dollar figures into percentages, so you can compare a $90,000 year with a $250,000 year, or one type of job with another.
Using the electrician example: $108,000 ÷ $180,000 × 100 = 60% gross margin, and $74,000 ÷ $180,000 × 100 = 41.1% net margin. Put simply, every $100 of work (ex GST) leaves $60 after direct costs and $41.10 after everything.
Margin vs markup: the quoting trap
Markup is profit as a percentage of cost; margin is profit as a percentage of the price. They are not the same number. If materials cost you $1,000 and you add a 50% markup, you charge $1,500 and your margin on those materials is $500 ÷ $1,500 = 33.3%, not 50%. Tradies who quote "cost plus 20%" and then aim for a 20% margin end up with roughly 16.7%. To hit a target margin, divide cost by (1 − margin): a 25% margin on $1,000 of materials means charging $1,000 ÷ 0.75 = $1,333.33 ex GST.
Gross profit vs net profit: a worked P&L for an Australian tradie
Here is a full year for Sam, a sole trader electrician registered for GST, for the 2025–26 financial year. Sam invoiced $198,000 including GST. Of that, $18,000 is GST collected for the ATO, so revenue in the P&L is $180,000. Every expense below is also shown ex GST, because Sam claims the GST on purchases back as credits on the BAS.
| Profit and loss, year to 30 June 2026 | AUD (ex GST) |
|---|---|
| Revenue (invoiced $198,000 − $18,000 GST) | $180,000 |
| Materials and parts | $48,000 |
| Subcontractor labour | $20,000 |
| Job-specific equipment hire | $4,000 |
| Cost of sales | $72,000 |
| Gross profit (60.0% margin) | $108,000 |
| Vehicle running costs | $12,000 |
| Depreciation on tools and test equipment | $4,000 |
| Advertising and website | $3,900 |
| Public liability and other insurance | $3,200 |
| Accountant and BAS agent | $2,500 |
| Phone, internet and software | $2,400 |
| Home office | $1,800 |
| Licences and memberships | $1,500 |
| Bank and merchant fees | $1,200 |
| Total overheads | $32,500 |
| Operating profit | $75,500 |
| Interest on vehicle loan | $1,500 |
| Net profit (41.1% margin) | $74,000 |
Three things are deliberately missing from Sam's P&L: the $18,000 of GST, the $60,000 Sam transferred to a personal account during the year, and income tax. Each is explained below. Sam's net profit of $74,000 is the figure that flows into his individual tax return.
Try it with your own numbers
Should a profit and loss statement include GST?
No, not if you are registered for GST. The GST you charge is collected on behalf of the ATO and paid over on your BAS, so it is not your income. The ATO lists GST collected among amounts that are not assessable income, and says to exclude GST from income and deductions when you work out your tax.
The same logic applies to purchases. When a GST-registered business buys $1,100 of materials including GST, it claims $100 back as a GST credit, so the real cost is $1,000. Put $1,000 in the P&L and the $100 in your GST account.
The exception is a business that is not registered for GST (turnover under $75,000 and not voluntarily registered). It charges no GST and cannot claim GST credits, so the GST it pays on purchases is a genuine cost. A non-registered sole trader records that same materials bill at $1,100. This is one reason two businesses with identical jobs can show different gross margins. If you are unsure which side of the line you are on, see our GST registration threshold guide, and use how to calculate GST to back the tax out of inclusive amounts (divide by 11 for the GST, or by 1.1 for the ex-GST price).
Where do tax and drawings go: sole trader vs company?
For a sole trader, income tax and drawings both sit outside the business P&L. For a company, the owner's salary and super are business expenses and company tax appears as a line under net profit before tax. The structure changes what "net profit" means, so check which version you are reading.
Sole trader
A sole trader and their business are the same taxpayer. The ATO says a sole trader cannot pay themselves a wage, and any nominal wage is treated as a distribution of profit. Money taken for personal use is drawings and is not deductible. Sam's $60,000 of transfers do not change his net profit or his tax: the full $74,000 goes into his individual return, where it is taxed at his personal marginal rates alongside any other income. That is why many sole traders set aside a share of every payment for tax, or pay PAYG instalments through the year. For the invoicing side, see how to invoice as a sole trader.
Company (Pty Ltd)
A company is a separate taxpayer. If Sam traded through a company and paid himself a $60,000 salary, that salary plus 12% super ($7,200) would be expenses, so profit before tax would fall from $74,000 to $6,800. A company that qualifies as a base rate entity (aggregated turnover under $50 million and no more than 80% passive income) pays tax at 25%, so the company would owe $1,700 and show a net profit after tax of $5,100. Sam would then pay personal tax on his salary separately. The two P&Ls look very different, yet the business performed identically. Compare like with like.
Business.gov.au has a plain summary of the tax differences between a sole trader and a company, and the ATO publishes current company tax rates.
How to read a profit and loss statement in five minutes
Read a P&L from the top down, and stop at three checkpoints: revenue, gross profit and net profit. At each one, compare the figure with the same period last year, then turn it into a percentage of revenue. Most of what matters shows up in those three comparisons.
- Check the period and basis. Is it a month, a quarter or a financial year (1 July to 30 June)? Is it cash basis (income when paid) or accrual (income when invoiced)? Accrual P&Ls include unpaid invoices.
- Confirm it is ex GST. Revenue should match your BAS sales total less the GST. If it looks 10% high, someone has included GST.
- Look at gross margin, not just gross profit. Revenue up 20% with gross margin down from 60% to 52% means you are working harder for less per job. Usually that is underquoting or rising supplier prices.
- Scan overheads for creep. Subscriptions, vehicle costs and insurance grow quietly. Any line that grew faster than revenue deserves a question.
- Read net margin last. Net margin answers the real question: out of every $100 of work, how much do you keep before personal tax?
- Pair it with the balance sheet. A P&L says nothing about money owed to you. A profitable year with $40,000 in unpaid invoices can still feel broke; your accounts receivable explains the gap.
What if gross profit is healthy but net profit is thin?
A strong gross margin with a weak net margin means pricing is fine and overheads are the problem. A weak gross margin means the problem is inside the jobs themselves. Diagnose which one before cutting anything.
- To lift gross profit: quote with margin maths instead of markup, review your hourly rate every year, pass on supplier price rises with a dated price list, charge for call-outs and variations, and track which job types earn the best margin.
- To lift net profit: cancel unused subscriptions, review insurance and vehicle costs annually, cut bad debts by taking deposits and chasing on schedule, and move clients to bank transfer or PayID to reduce card fees.
Unpaid invoices hit net profit too. An invoice you eventually write off is income you recorded, paid GST on (if you account on an accrual basis) and never received. Our guide to writing off bad debts covers how to claim it back.
This article is general information, not tax, accounting or financial advice. Figures are illustrative. For guidance specific to your situation, see the ATO's guidance on business deductions and business.gov.au, or speak to a registered tax agent.
Frequently asked questions
Is gross profit or net profit more important?
You need both. Gross profit tells you whether each job or product is priced high enough to cover its direct costs, and net profit tells you whether the whole business makes money once overheads are paid. A healthy gross profit with a weak net profit points to overheads, while a weak gross profit points to pricing or job costs.
Can gross profit be positive while net profit is negative?
Yes. If your overheads such as rent, vehicles, insurance, software and interest add up to more than your gross profit, you make a net loss even though every job earns more than it costs to deliver. The fix is either higher volume, better prices or lower overheads.
Should I include GST when calculating profit?
No. If you are registered for GST, use GST-exclusive figures for both income and expenses, because the GST you collect belongs to the ATO and the GST you pay on purchases is usually claimed back as a credit. If you are not registered, record expenses at the full amount you paid, since you cannot claim the GST back.
Are sole trader drawings an expense in the P&L?
No. Money a sole trader transfers to themselves is drawings, which is a withdrawal of profit and not a business expense. The ATO treats any nominal wage a sole trader pays themselves as a distribution of profit, so your net profit and your tax are the same no matter how much you draw.
What is a good gross profit margin for a small business?
It depends heavily on the industry. Service businesses with few materials often run gross margins well above 50 per cent, while resellers and trades that supply a lot of materials run lower. Compare your margin with your own past years and with your quotes, rather than with a single universal benchmark.
Strip the GST out of your numbers
Profit is always worked out on GST-exclusive figures. Convert any GST-inclusive amount in one step. Free, no signup.
Open the GST calculator