At the core, profit is earnings minus expenses. However, we want to bifurcate and come up with various variations of profit to understand the business better. Therefore, at the first level, we have gross profit.
Gross Profit is nothing but ‘Sales – COGS’
This shows how much profit are we earning without considering our expenses and only considering the cost of the product that we are selling.
Next comes the Net Profit. Net Profit is ‘Gross Profit – Total Expenses’. The expenses include all the direct and indirect expenses incurred to achieve that sales.
However, some of these expenses might be operational related and some of the expenses may be stuff like taxes. Therefore, we sub-divide it again to understand it better. S, we first subtract all the operating expenses and call it as operating profit. Later, we subtract the rest of the expenses and call it as Net Profit or Bottom Line. This is what is going into the bank.