Gross profit measures the difference between revenue and cost of goods sold and is one of the best indicators of overall profitability for a business.
Every business’s income statement will include gross profit. A high gross profit can mean a business has an efficient operating process, while a low gross profit can mean a business is not making good use of its resources or has not priced its products or services high enough, causing profitability to suffer.
Gross profit is also sometimes referred to as sales profit or gross income, and it is not to be confused with gross margin. While gross margin is expressed as a percentage, gross profit is a standalone dollar amount.
The formula for gross profit is as follows:
Gross Profit = Revenue – Cost of Goods Sold (COGS)
The following example shows a business with $750,000 in revenue and $450,000 in cost of goods sold. The calculation for gross profit would read as follows, showing a gross profit of $350,000:
$750,000 – $450,000 = $350,000