What is gross profit?
Gross profit is the first profit line on the [income statement](/glossary/income-statement). It measures what remains after paying the direct costs of what you sell, and it must cover all [operating expenses](/glossary/operating-expenses) before the business makes a net profit.
Formulas
Gross profit = Revenue − [Cost of goods sold](/glossary/cost-of-goods-sold)
Gross profit margin = Gross profit ÷ Revenue × 100
Example
A clothing store has revenue of $200,000 and COGS of $120,000. Gross profit = $80,000 and gross margin = 40%. Every $1 of sales leaves 40 cents to pay for rent, staff and other overheads.
What affects gross margin
- Selling prices and discounting
- Supplier costs and purchase volumes
- Product mix
- Waste, theft and stock write-downs
- Production efficiency and direct labour costs
Gross profit vs net profit
[Net income](/glossary/net-income) subtracts all expenses, including overheads, interest and tax. A business can have strong gross profit but still lose money if overheads are too high.
Why it matters
Gross margin trends reveal pricing power and cost control. Comparing margins by product or customer shows where the business really makes money. See also [markup](/glossary/markup), which is based on cost rather than price.