Gross Profit is one of several important measurements a company uses in evaluating its financial performance. It helps a company to see what it is earning after costs (for products and/or services) as is a fundamental measurement as to a company’s profitability. Higher Gross Profit is generally preferred as it provides the company with financial resources to pay for research, product development, and other costs associated with running and growing a business. A company that has little Gross Profit has limited resources.Gross Profit can simply be calculated by using Revenue and Cost of Goods or Sales.
Calculate Gross Profit by taking total Gross or Sales Revenue, minus total Sales Costs or Cost of Goods. If you sell your knick-knack for $10, and it costs you $4 to manufacture (also known as Cost of Goods) or $4 to buy wholesale, your Gross Profit is $6.
2
Divide your Gross Profit by your Gross Sales Revenue to get your percentage Gross Margin, another measure of profitability. Using the example in Step 2, you would divide your Gross Profit of $6 by your Revenue of $10, for a 60% Gross Margin.
3
Take a look at the Sample Income Statement in Additional Resources below to get a better sense of how Gross Profit fits in context with a company’s financial statements.
Tips & Warnings
Note that Gross Profit is profit before operating expenses, such as paying salaries and turning on the lights.
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