gross profit
Revenue minus the cost of goods sold (COGS), representing the profit before operating expenses, interest, and taxes.
Example
“With $10M in revenue and $4M in COGS, the company's gross profit was $6M — a 60% gross margin.”
Memory Tip
GROSS profit = revenue minus COGS only. Before rent, salaries, or anything else.
Why It Matters
Gross profit helps you understand how efficiently a business converts sales into actual profit after covering the direct costs of making products. For consumers and investors, understanding this metric reveals whether a company is managing its production costs effectively and has enough margin to cover operating expenses while still generating profit.
Common Misconception
Many people confuse gross profit with net profit and think that if a company has high gross profit, it will definitely be profitable overall. However, a business can have excellent gross profit but still lose money if operating expenses like salaries, rent, and marketing are too high.
In Practice
A coffee shop generates 100,000 dollars in revenue per year. The cost of coffee beans, cups, and supplies totals 35,000 dollars. The gross profit is therefore 65,000 dollars. However, after paying 50,000 dollars for rent, utilities, and employee wages, the shop only has 15,000 dollars in net profit, showing that high gross profit does not guarantee overall profitability.
Etymology
GROSS (total, before deductions) PROFIT (gain). Profit at the GROSSEST (most basic) level before overhead.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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