Gross Profit is the profit made by a company after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit can also be referred to as Sales Profit or Gross Income based on where you are from. This usually appears on a company’s income statement and can be calculated by subtracting the cost of goods sold (COGS) from revenue (sales). To find the gross profit, you first need to understand two things – 1. The revenue and 2. The cost of goods that are sold. Revenue is nothing but the total amount you make in sales. The expenses that are directly associated with producing your products or services should also be taken into consideration when you calculate the cost of goods sold.
However, for a service business, the allocated overhead, labour, benefits, and payroll taxes of those who generate billable hours should be considered and reflected as service-related costs.
The Gross Profit Formula
Gross profit = Revenue – Cost Of Goods Sold (COGS)
Sales revenue or simply revenue is the monetary amount obtained by a company from selling goods and services to their customers. This amount can be realized either as cash sales or credit sales.
COST OF GOODS SOLD (COGS)
This is nothing but the expense incurred directly by producing a product. Expenses such as raw materials and labor costs generally contribute to higher COGS. Companies and manufacturers constantly try to keep this cost as low as possible in order to boost their gross profit.
Gross margin is always expressed as a percentage. Mathematically,
Gross Margin = Gross Profit / Total Revenue x 100
HOW GROSS PROFIT HELPS YOUR BUSINESS
Gross profit is a simple metric through which you can figure how efficiently you produce revenue. Strike the right balance between the revenue and the production cost to achieve a respectable gross profit. In simple terms, the greater your revenue and the lower your production costs are, the higher your gross profit would be. Make adjustments to your production costs if you observe them be close to or above your revenue by implementing less expensive ways to produce your goods or services. Similar adjustments can be made at the other end with regards to increasing your revenue like expanding your marketing efforts and adding depth to your product delivery processes.
GROSS PROFIT Vs NET PROFIT
As their names suggest, both these metrics are directly related to profit i.e., the amount of money your business gains. Though they might be mistaken for one another, you will see the difference when you subtract expenses.
Gross profit is a company’s profit before subtracting expenses. Net profit, on the other hand, is a company’s profit after subtracting all expenses like operating cost, taxes and interest. It is to be noted the Cost Of Goods Sold (COGS) will be deducted while calculating both these profits.
Gross Profit = Revenue – COGS
Net Profit = Revenue – COGS – Expenses