Gross Profit Explained

Gross profit is the money left after you subtract the direct costs of producing what you sell from your revenue. It tells you whether your core activity — buying or making things and selling them — is profitable before overheads like rent, marketing and admin are taken into account.

If your gross profit is healthy, your pricing and sourcing are broadly working. If it is thin or negative, no amount of cost-cutting elsewhere will fix the business until the gross profit problem is solved.

Gross Profit = Revenue − Cost of Goods Sold (COGS)

Gross Margin = (Gross Profit ÷ Revenue) × 100

Gross profit is the amount in pounds; gross margin is that amount as a percentage of revenue. Margin makes it easier to compare performance across periods or against other businesses, because it is not distorted by size.

COGS is the direct cost of producing what you sold — the things that go up and down with your sales volume:

• Raw materials and stock you purchase to resell
• Direct labour used to make or prepare the product
• Direct costs of fulfilling orders, such as packaging and inbound delivery

Overheads — rent, utilities, software, marketing, salaries of staff not directly making the product — are not part of COGS. They are deducted later, when working out net profit.

Gross profit only deducts direct costs. Net profit also deducts overheads, interest and tax — it is the bottom line of the business. A company can have a strong gross profit but a weak net profit if its overheads are too high. Gross profit tells you whether the product itself pays; net profit tells you whether the whole business pays.

The profit calculator works out profit per sale. Gross profit works the same maths at company level, using total revenue and total cost of goods sold. The formula is identical — only the scale changes.

There is no universal target. A supermarket may run on a gross margin of 25% and still be profitable because of high volume; a consultancy may need 60% to cover its overheads. The right approach is to compare your margin to typical figures for your sector, and to your own figures over time, rather than chasing a single number.

Enter your revenue and cost of goods sold into the gross profit calculator to see your gross profit and gross margin instantly. To understand how many units you need to sell before fixed costs are covered, try the break-even calculator.