What is Gross Profit?

Gross profit is the first profit figure in your Profit and Loss statement. It represents your total revenue minus the direct costs of delivering your goods or services, known as cost of sales or cost of goods sold (COGS). It tells you how much money you make from your core business activity before paying for overheads like rent, utilities, admin staff, and marketing.

For a product-based business, cost of sales includes the purchase price of goods, raw materials, manufacturing costs, and direct labour involved in production. For a service business, it typically includes the direct labour costs of delivering the service, subcontractor costs, and any materials used. It does not include overhead expenses like office rent, insurance, accounting fees, or director's salary -- those come later in the P&L.

The gross profit margin (gross profit divided by revenue, expressed as a percentage) is one of the most watched financial metrics. It tells you how efficiently your business converts revenue into profit at the product or service level. A declining gross margin suggests your costs are rising faster than your prices, or you are discounting too heavily. Industry benchmarks vary widely -- a consulting firm might have 60-80% gross margins, while a retailer might operate at 20-40%.

Gross profit is also the starting point for understanding whether your business model is viable. If your gross profit is not large enough to cover your overhead expenses, no amount of cost-cutting on overheads will make the business profitable. You would need to either increase prices, reduce direct costs, or change your business model entirely.