gross profit
/ grohs PROF-it /
Go back to the phone-case shop. It sells a case for 25 that it bought for 9, so on that one sale it pockets 16 before worrying about rent, staff, or anything else. That 16 is the breathing room the product itself creates. Gross profit is that idea totalled across a whole period: what is left from sales after only the direct cost of the goods has been covered.
Precisely, gross profit equals revenue minus cost of goods sold. It is the very first subtotal on a multi-step income statement, measuring how much money the core product or service generates before any of the broader running costs of the business are taken out. For example, if a clothing store has 400,000 in sales and 240,000 in cost of goods sold, its gross profit is 160,000. Expressed as a percentage of sales (160,000 / 400,000 = 40%), it becomes the gross margin, a handy way to compare products or companies of different sizes.
Gross profit matters because it shows whether a business is even selling its products for more than they cost — the most basic test of a viable model. A thin or negative gross profit means there is no room to cover salaries, rent, and marketing, let alone make a real profit. But it is only a first cut: a healthy gross profit can still be entirely eaten up by heavy operating expenses below it, so gross profit tells you about the product, not yet about the whole business.
A café with 300,000 in sales and 90,000 of cost of goods sold has a gross profit of 210,000, a 70% gross margin — strong on the product, but that figure still has to cover all the wages and rent below it.
Gross profit = sales minus cost of goods sold, the first subtotal on a multi-step statement.
Gross profit ignores operating costs like rent and salaries, so a large gross profit can still end in a net loss once those are subtracted further down.