What is gross profit?
Gross profit is revenue minus the direct cost of the goods or services sold, showing how much a business makes on its sales before overheads.
What gross profit means
Gross profit sits a few lines down the profit and loss account:
Gross profit = revenue − cost of goods sold
It measures what each sale contributes before the fixed costs of running the business, such as rent, admin staff, insurance and marketing. Expressed as a percentage of revenue it becomes the gross margin.
Example
A joinery business makes and fits kitchens:
| Line | Amount |
|---|---|
| Revenue from 24 kitchens | £360,000 |
| Timber, worktops and fittings | (£126,000) |
| Fitters and subcontracted labour | (£90,000) |
| Gross profit | £144,000 |
| Gross margin | 40% |
Each kitchen sells for an average of £15,000 and contributes £6,000 towards overheads and profit.
Why it matters for your business
Gross profit is the clearest test of pricing. If it is too low, no amount of overhead-cutting will make the business properly profitable. Watching gross margin job by job, product by product or month by month shows where you are underquoting, discounting too much or losing control of materials.
It also tells you how many sales you need. If overheads are £96,000 a year and each kitchen contributes £6,000, the business needs 16 kitchens to break even. The 24 it sold left a net profit of about £48,000 before tax.
Consistency matters: decide which costs are direct and keep that split every year, or comparisons become meaningless. Labour is the usual grey area. Staff who work on the product are direct; office and management staff are overheads.
Gross profit vs net profit
Gross profit only deducts direct costs. Net profit deducts overheads, interest and tax too. A business can have a strong gross profit and still make a net loss if its overheads are too high.
For service businesses the direct costs are usually people. A consultancy paying freelancers £400 a day and charging clients £650 makes a gross profit of £250 a day on each of them, a margin of about 38%. If utilisation slips because people are waiting for work, gross profit falls even though day rates have not changed.
Watching that number weekly, rather than waiting for year-end accounts, gives you time to act.
Common questions
Subtract the cost of goods sold from revenue. For a shop that is sales less the cost of the stock sold; for a service business it is fees less direct costs such as subcontractors. Divide by revenue for the gross margin percentage. Track it monthly to spot pricing problems early.
It depends on the sector. Software and consultancy can exceed 70%, while retail is often 25% to 50% and construction 15% to 30%. Track your own margin over time and against similar businesses. A falling margin is an early warning sign.