Gross Profit
Revenue minus cost of goods sold, showing product profitability before operating expenses.
Gross profit measures how efficiently a business produces and sells its products before accounting for overhead costs like rent and salaries. It appears near the top of the income statement. Different industries have vastly different expectations—software companies often exceed 80% while grocery stores may operate at 25–30%.
Formula
Gross Profit = Revenue − Cost of Goods SoldExample
An online clothing store generates $100,000 in monthly revenue with $40,000 in COGS—gross profit is $60,000, which must cover rent, salaries, marketing, and still leave net profit.
Why It Matters for Your Business
Gross profit reveals whether your core business model is viable—if it's thin or negative, no amount of cost-cutting on overhead will save the business.
Practical Tips
- •Track gross profit by product line to identify your most and least profitable offerings.
- •Benchmark your gross margin against industry averages to gauge competitiveness.
More Accounting Terms
Accounts Payable
Money owed by a business to its suppliers or creditors for goods or services received but not yet paid for.
Accounts Receivable
Money owed to a business by its customers for goods or services delivered but not yet paid for.
Accrual Accounting
An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.
Asset
Any resource owned by a business that has economic value and can provide future benefits.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a specific point in time.
Related Financial Guides & Resources
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