What is Gross Profit?

Gross profit measures how much money remains from sales after paying the direct costs of what was sold. It is calculated as revenue minus cost of goods sold. Gross margin expresses it as a percentage of revenue.

Example

A store sells $100,000 of merchandise that cost $60,000. Gross profit is $40,000, and gross margin is 40%.

Why it matters

Gross profit must cover all operating expenses, such as rent, salaries and marketing, before the business makes any net income. A business with thin gross margins needs high volume or very low overhead.

Gross margin trends are revealing:

• Falling margin can mean supplier price increases, discounting, waste or theft
• Rising margin can mean better pricing, product mix or purchasing

Gross profit by segment

Reporting gross profit by product line, channel or service type shows which parts of the business earn the most. For example, a salon might compare service and retail margins; an ecommerce seller might compare marketplace and direct sales.

Accuracy depends on the books

Gross profit is only meaningful when inventory, freight and direct costs are recorded correctly, and when sales tax and pass-through amounts are kept out of revenue. On tax returns, gross profit appears on Schedule C Part I and business returns, figured as the IRS describes in Publication 334.

See our guide to financial ratios and how to read a profit and loss statement.

Related terms

• Cost of Goods Sold: Cost of goods sold is the direct cost of the products a business sold during a period.
• Net Income: Net income is what remains after all expenses are subtracted from revenue for a period.
• Operating Expenses: Operating expenses are the costs of running a business that are not directly tied to producing the goods or services sold.

Browse more definitions in the small business glossary.