Gross Profit vs. Net Profit – Why You Need to Know the Difference

Making money is the ultimate goal for those that sell on eBay. But, how do you know if you are actually making any money at the end of the day? You first need to understand how to calculate the different kinds of profit you deal with selling on eBay.

There are two kinds of profits that you will be dealing with – gross profits and net profits. Gross profits are what you make from the sale of goods, less what it cost you to sell the goods.

The formula to figure out gross profit can be found below:

Sale Price (including shipping, handling & insurance) – Purchase Price – Shipping Costs – eBay Fees – Merchant Fees = Gross Profit

We will cover eBay and merchant (PayPal) fees in a future post. Purchase price is simply what you paid for the item. Shipping costs includes the postage you paid to ship your order and the insurance costs you incurred.

Net profit is what you have left over after you subtract all of your business expenses from your gross profit. Business expenses include the expense of running a business, i.e. your overhead costs, such as shipping expenses, phone bills, Internet access bills, vehicle expenses, etc. Technically, your salary is also subtracted from gross profit to figure net profit, as it is an expense to your business.

Net profit is the number that really matters, as this is the true indication of your profitability. It will tell you if you are making enough money to make this all worth your time and effort.

Having a positive net profit means that you are running your business correctly. It also means that your business has the capital to grow. If your business is making money, then you will be able to purchase more inventory that will become best sellers for you, which will give you a higher net profit.

Your accountant should be generating monthly reports for you that will give you a snapshot of the health of your company. Your accountant will show you exactly what you are spending your money on which will allow you to see what parts of your business need work. This is exactly why we always recommend that you consult with professionals if you want to be an eBay selling success.

Now that you know the difference between gross and net profit, you will be able to figure out how successful your business is and if it is all worth the time and effort you put into your eBay business.

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