Gross Profit

Gross profit describes profits before any deductions—meaning this isn’t yet a final calculation of actual earnings but an in-between stage of money temporarily earned.

While gross profits have already factored in the costs of producing a product or providing a service (as these profits come in post-sale), they don’t deduct service-fees, taxes, depreciation, or miscellaneous expenses. Instead, this is what net profits calculate.

In the simplest of terms:

Gross Profits = Net Sales – Cost of Goods

Gross profits are a simple calculation of what’s earned after a product is produced and sold.

The direct costs associated with sales that are calculated into gross profits usually consist of manufacturing expenses, labor, raw materials, selling, and marketing.

For example: A bakery sells bread. In order to make the bread, they have to buy ingredients. Once they sell the bread, their gross profit is the price of the bread minus the cost of the ingredients. This doesn’t yet account for the taxes the bakery has to pay on the profits it has made.

Gross Profit Margin

To gain an even better idea of gross profits, you can calculate the gross profit margin on your goods. This is the margin of profit you make on each individual item sold.

To calculate the gross profit margin, simply divide the gross profit by the number of products sold. This margin is usually shown as a percentage. You can aim to increase the margin, for example, by either boosting your product prices or lowering your manufacturing costs.

By understanding your costs, gross profits, and net profits, a business can gain a good understanding of where most of their money is made and lost. With this information at your disposal, you can then tackle any shortcomings in your current business plans and strategies.