Gross profit: formula, example and gross margin
Gross profit shows how much money a company earns on its core sales after covering the direct costs of a product or service. It is a fundamental indicator of the “health” of a business model: it reflects pricing power, the structure of the product portfolio, and control over the cost of goods sold. Unlike gross margin, %, which shows the share of profit in revenue, gross profit is an absolute amount that funds operating expenses, growth, and investment.
What the metric measures
It answers whether we generate enough margin at the product/service level to sustain operations and earn net profit. It helps you see exactly where you make money and where the result is “eroded” by discounts, returns, or rising cost of goods sold.
Calculation
- Gross profit = Revenue (net) − Cost of goods sold (COGS)
- Gross margin, % = Gross profit / Revenue × 100
Notes: revenue excludes VAT/excise taxes and follows consistent rules for discounts and returns; COGS includes direct materials, labor, and manufacturing overhead; the inventory valuation method (FIFO, weighted average) and the markdown policy must be uniform. For marketplaces, define in advance how commissions are accounted for.
Calculation example
A manufacturer has revenue excluding VAT of 2,400,000 and a cost of goods sold (materials, direct labour, production overheads) of 1,560,000. Gross profit = 2,400,000 − 1,560,000 = 840,000, gross margin = 35%.
Data sources
ERP/accounting system (1C, etc.), inventory and costing module, CRM/billing for revenue; aligned SKU/category/channel reference lists and uniform rules for discounts and returns.
Interpretation
- Trend: growth with stable revenue — improving margin; a decline with growing revenue — pressure from discounts or COGS
- Price–volume–mix: break down the change into the contribution of each factor
- Cost drivers: purchase prices, logistics, defects/returns, inventory markdowns
- One-off effects: promotions, exchange rates — flag them separately so they do not distort the baseline
- Cash vs. profit: gross profit ≠ cash flow
Useful breakdowns
- Products / categories / SKUs; brands
- Channels: online, offline, marketplaces, distributors
- Regions / points of sale / teams
- Customer segments: new / repeat, wholesale / retail
- Promotions / discounts and reasons for returns
- Suppliers and batches
Dashboard visualizations
- Bar or area charts of gross profit with a gross margin, % line
- Waterfall (bridge) of the change: price, volume, mix, discounts, COGS
- Heat map by SKU/category
- Plan vs. actual with “minimum — norm — target” thresholds
- Breakdown by channel/region
How to set targets
Base them on your pricing strategy, target cost of goods sold, mix, and promotional calendar. Set targets in UAH and in gross margin, %, establish discount limits and approval rules. Review monthly/quarterly, taking seasonality and FX into account.
Common mistakes
- Including VAT in revenue; ignoring returns/bonuses
- Mixing up goods produced and goods sold
- Inconsistent inventory valuation between periods
- Incorrect accounting for logistics, defects, markdowns
- Comparing unequal periods or currencies without conversion
Questions for discussion
- What had the biggest impact on the change in gross profit this period?
- Which SKUs/categories have low margins and why?
- Where can prices or promotions be adjusted without losing volume?
- Are there suppliers/batches whose terms need to be reviewed?