What Is Gross Profit? Definition, Formula, and Calculation

For publicly-traded companies, gross profit can be found on the income statements right after the COGS line item. See lower in the article for an example using Microsoft’s income statement. Gross sales, also known as gross revenue, is the sum of all revenue a business generates before deductions. Whereas gross profit is the sum of how much a business profits after deductions are accounted for. Let’s assume that a manufacturer has net sales of $60,000 and its cost of goods sold (using absorption costing) is $39,000.

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It measures the proportion of revenue that remains as gross profit after deducting the cost of goods sold (COGS). It indicates the profitability of a business’s core operations and its ability to generate profit from each unit of revenue. To put it simply, gross profit is the revenue a business earns from its sales minus the expenses directly related to producing or delivering those goods or services. It gives you a clear understanding of how much money is left over from sales after accounting for the direct costs incurred in creating or providing the products or services. A low gross profit can indicate that the company is facing high production costs or cannot price its products high enough relative to its costs.

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A good gross profit is relative – it depends on the industry, business model, and market conditions. The key is to ensure efficient cost management, strong pricing strategies, and sustainable margins to maintain financial health. Understanding gross profit gross profit is fundamental to running a successful business, yet many entrepreneurs and business owners struggle to grasp this critical financial metric.

• If your margin falls below 40 percent, it could be a signal to explore ways to reduce your product-related costs.
• Positive cash flows include your sales revenue plus additional income sources, such as investments or money earned from the sale of an asset.
• Let’s assume that a manufacturer has net sales of $60,000 and its cost of goods sold (using absorption costing) is $39,000.
• Gross profit and net income reveal different levels of a company’s profit.
• Khan completed his Master of Accounting degree at the University of New Mexico.

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• Different industries have varying cost structures, so what’s considered a strong gross profit in one industry may be weak in another.
• Gross Profit is important because it shows how well a company is managing its production costs in relation to its sales.
• One important metric is the gross profit margin which you can calculate by subtracting the cost of goods sold from a company’s revenue.
• Understanding gross profit is fundamental to running a successful business, yet many entrepreneurs and business owners struggle to grasp this critical financial metric.

Gross profit represented as a percentage of revenue is known as the gross profit margin — a useful indicator of a company’s financial health. The gross profit margin shows the proportion of revenues that are left over after considering the cost of goods sold. The gross profit margin is the funds source for meeting additional expenses and adding to savings in the company’s retained earnings account. Within the same industry, a company with a higher gross profit margin is more efficient than one with a lower gross profit margin. To find the gross profit, you need to understand what the revenue and cost of goods sold are.

• Examples of variable costs are direct labor, materials, depreciation and production.
• For investors, gross profit is used to compare the efficiency of similar companies.
• Total revenue refers to the total amount of money earned from the sale of your business’s products or services.
• A growing bottom line signifies a thriving company, while declining profits may indicate a struggling enterprise.
• Overhead costs not directly related to sales, such as payroll taxes, building rental, and administrative expenses, are not generally included in the cost of revenue.
• Our team is ready to learn about your business and guide you to the right solution.
• Monitoring gross profit alongside gross margin helps investors understand the company’s pricing strategies and cost efficiency​.

Variable Costs Included

Removing the “noise” of administrative or operating costs allows a company to think strategically about product performance and to implement cost control strategies more effectively. Gross profit and net income reveal different levels of a company’s profit. In its 2024 fiscal Accounting Periods and Methods year, we can see the company registered $43.45 billion in revenue, costing $33.85 billion to produce. That leaves the company, as reflected in the third line of its income statement, with a gross profit of $9.6 billion. And it forms the basis of the price-to-earnings ratio, the metric many stock market investors use to determine if a company’s shares are under or overvalued. Unlike gross profit, net income accounts for all of a business’s costs.

This is the final figure located at the bottom of the income statement. Variable costs are the cost to the Company that varies with the output. It should be noted that  fixed costs are not considered when deducting the cost of goods sold from the revenue to calculate it. Gross profit is a company’s total profit after deducting the cost of doing business, specifically its COGS. The gross profit of a company is the total sales of the firm minus the total cost of the goods sold.

Gross profit calculation example

If your margin falls below 40 percent, it could be a signal to explore ways to reduce your product-related costs. The caveat is that gross profit disregards some additional expenses the company incurs, like operating costs. Net profit fills in these gaps by accounting for all business expenses. Understanding gross profit will help Sally assess the core profitability of the products after accounting for production costs. Gross profit only considers direct production costs, while net profit accounts for all expenses, including operating costs, taxes, and interest. Gross profit is the dollar amount remaining after subtracting COGS from revenue.

Gross profit is revenue less the cost of goods sold and is expressed as a dollar figure. A company’s gross margin is the gross profit compared to its sales and is expressed as a percentage. Companies use gross margin to measure how their production costs relate to their revenues. A company might strive to slash labor costs or source cheaper suppliers of materials if its gross margin is falling, or it may decide to increase prices as a revenue-increasing measure. Gross margin is the percentage of money a company keeps from its sales after covering the direct costs of producing its goods or services.

This simple formula helps measure the value your products or services bring to the business. Investors and business owners evaluate their company’s gross profit to understand the impact of price changes on profitability. As previously mentioned, operating profit (also referred to as earnings before interest and taxes, or EBIT) is an essential measure of a company’s profitability.