How to Calculate the Gross Profit in Finance

Calculating your gross profit can help you fine-tune your business decisions.

A profit that isn't measured correctly is a profit without merit. In the world of corporate finance, every single transaction is carefully recorded and then later analyzed. The goal is to find hidden meaning and knowledge -- knowledge that can be used to make more intelligent business decisions. One of these tidbits of information is the gross profit, which measures how much money a company actually earns from sales. Suffice it to say, if you earned $1,000 selling 1,000 cookies, but each cookie cost $1 to make, then your gross profit isn't even close to $1,000.

Instructions

1. Identify the company's total revenue. This refers to all the money it earned by selling goods and providing services.

2. Determine the company's cost of goods and services. This value marks how much it cost a company to sell said goods or provide said services. For instance, the process of selling computers through an e-commerce website might include costs such as advertisement expenses, website maintenance, etc.

3. Subtract the cost of goods and services from the total revenue. If the company had a total 2011 revenue of $1 million and $900,000 in costs for goods and services, then the gross profit would be $100,000.

References

• The University of Tennessee: Finance and Accounting for Non-Financial Managers
• Investopedia: Gross Profit Definition