Glossary

Gross profit

Definition

Gross profit is revenue minus the cost of goods sold. It shows how much a business earns from its products before operating expenses, interest and tax. Expressed as a percentage of revenue it becomes the gross margin, a key measure of pricing power and production or purchasing efficiency.

How it works

Gross profit sits near the top of an income statement presented by function, between cost of sales and operating expenses. A falling gross margin usually means rising purchase costs, discounting or a shift in sales mix toward cheaper products.

Gross margin is not the same as markup: a product bought for 60 and sold for 100 has a 40% gross margin but a 66.7% markup on cost. Use the margin and markup calculator to convert between the two. Gross profit also differs from contribution margin, which deducts all variable costs, including variable selling costs, and excludes fixed production overhead.

Formula

Gross profit = Revenue - Cost of goods sold

Gross margin % = Gross profit / Revenue × 100

Example: gross margin of an online shop

An online shop sells 250,000 of goods in a year. The goods cost 160,000 including inbound freight. Gross profit is 90,000 and the gross margin is 90,000 / 250,000 = 36%. Out of every 100 of sales, 36 is left to pay staff, rent, marketing and tax.

Related terms

Cost of goods sold (COGS)
Cost of goods sold is the cost of the inventory a business sold during a period: purchase or production cost plus the costs of bringing goods to their saleable condition. It equals opening inventory plus purchases minus closing inventory.
Revenue
Revenue is the income a business earns from its ordinary activities, such as selling goods or providing services, measured at the amount it expects to be entitled to. Under the accrual basis it is recognised when control passes to the customer, not when cash arrives.
Net income (net profit)
Net income is what remains of revenue after every expense for the period, including cost of sales, operating expenses, finance costs and income tax. It is the bottom line of the income statement and flows into retained earnings at year end.
Contribution margin
Contribution margin is sales minus variable costs, in total or per unit. It is the amount each sale contributes first to covering fixed costs and then to profit, and dividing it by sales gives the contribution margin ratio.
Income statement (profit and loss)
The income statement reports revenue, expenses and the resulting profit or loss for a period. Presented by function, it shows revenue, cost of sales, gross profit, operating expenses and net profit.

Guides

IFRS Financial Statements: How the Balance Sheet, Income Statement and Cash Flow Fit Together

Free calculators

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FAQ

Questions about Gross profit

What is a good gross margin?

It depends on the industry. Grocery retail often runs below 30%, while software can exceed 70%. Compare with your own history and with businesses that have a similar model.

Is gross profit the same as net profit?

No. Net profit is what remains after deducting operating expenses, finance costs and income tax from gross profit.

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