Gross profit is the amount a business earns from its revenue after subtracting the direct costs of producing goods or delivering services, but before accounting for operating expenses, taxes, or interest.
What is Gross Profit?
Gross profit represents the financial gain a company makes from its core operations, calculated as total revenue minus the cost of goods sold (COGS). COGS includes all direct costs related to producing a product or delivering a service, such as raw materials, manufacturing labor, and production overhead. Gross profit is a key metric for understanding how efficiently a company produces and sells its goods, and it serves as the starting point for calculating other profitability measures, such as operating profit and net profit.
In business analysis, gross profit is often expressed as a gross profit margin, which shows gross profit as a percentage of total revenue. A higher margin generally indicates that the company is managing its production costs well or selling its products at a premium. For non-U.S. founders operating U.S. companies, monitoring gross profit is important for pricing strategies, cost management, and investor reporting, especially in sectors like e-commerce where cost control directly impacts competitiveness.
For example, if a company sells $100,000 worth of products in a year and its COGS is $60,000, its gross profit is $40,000. This figure does not yet include expenses like marketing, rent, salaries (outside of production labor), or taxes.
In summary, gross profit is a fundamental measure of a company’s operational health. By keeping a close eye on it, business owners can identify inefficiencies, adjust pricing, and make informed decisions about scaling their operations. It is a critical number that bridges the gap between revenue and overall profitability.
