Gross profit is a core concept in accounting and financial management that shows the difference between a company’s revenue and its cost of goods sold. In other words, it is the profit left after deducting the costs of the goods or raw materials sold, but before taking other operating expenses into account, such as salaries, rent, marketing and administration.
Formula
Gross profit is typically calculated like this:
Gross profit = Revenue - VareforbrugExample
A company sells goods for DKK 1,000,000 in a year. To sell the goods, the company has had cost of goods sold of DKK 600,000:
Gross profit = DKK 1,000,000 - DKK 600,000 = DKK 400,000.The company therefore has DKK 400,000 in gross profit, which must cover all other expenses and, hopefully, result in a profit in the end.
Gross margin and gross profit
The term is often confused with gross margin. Gross margin is gross profit measured as a percentage of revenue. It shows how much of revenue remains once the cost of goods sold has been deducted.
Formula:
Bruttoavance (%) = (Gross profit / Revenue) × 100Why is gross profit important?
- It provides a clear picture of how profitable a company’s core business is, without other operating expenses affecting it.
- It makes it possible to compare with other companies in the same industry.
- It helps management assess whether pricing and procurement policy are effective.