Gross Profit

Gross profit shows how much a business earns from its core product before paying for overheads such as rent, salaries, marketing and administration. It is calculated as revenue minus cost of goods sold.

For example, a clothing retailer with sales of 800,000 and cost of goods sold of 480,000 has a gross profit of 320,000. That 320,000 must then cover all its other costs, such as staff, shop rent and advertising, with anything left over becoming operating profit.

Gross profit is a useful measure of how efficiently a business produces or buys what it sells, and how much pricing power it has. If suppliers raise prices and the business cannot pass them on, gross profit shrinks.

Because absolute amounts are hard to compare between businesses of different sizes, gross profit is often expressed as a percentage of revenue, called gross margin. In this example, the gross margin is 40%.