Gross profit from sales: formula and calculation example
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 one of the main indicators of the "health" of a business model: it reflects pricing power, the structure of the product portfolio, and control over cost of sales.
What the metric measures
Gross profit answers the question: are we generating enough margin at the product/service level to fund operations, marketing, and growth and still earn a net profit? The metric helps you see where exactly we make money and where we "erode" results through discounts, returns, or high supply costs.
How it is calculated
Basic formula:
Gross profit = Revenue (excluding VAT and returns) – Cost of goods sold (COGS).
Additional metric: Gross margin, % = Gross profit / Revenue × 100.
For comparability, set uniform rules: how discounts and bonuses are accounted for; which event triggers revenue recognition (payment, shipment, signed acceptance certificate); whether logistics and packaging are included in cost of sales; which inventory valuation method is used (FIFO, weighted average, etc.).
Calculation example
Monthly revenue excluding VAT is 500,000 and the cost of goods sold is 320,000. Gross profit = 500,000 − 320,000 = 180,000, gross margin = 180,000 / 500,000 × 100 = 36%. If last month’s margin was 39%, check discounts, purchase prices and the product mix.
Where the data comes from
The main sources are the ERP/accounting system (1C and others), the warehouse management module, cost calculations, and CRM and billing for revenue. It is important to align reference data (SKUs, categories, channels) and uniform rules for discounts and returns.
How to interpret it
- Trend over time. Growing gross profit with stable revenue signals improving margin; a decline while revenue grows points to discount pressure or rising cost of sales.
- Mix and price. Assess the contribution of changes in price, volume, and product mix. Customers switching to more expensive SKUs lifts gross profit even without more units sold.
- Cost of sales. Track the impact of purchase prices, logistics, defects, and write-offs. Flag one-off factors (exchange rate, promotions) separately so they do not distort the trend.
Useful breakdowns for analysis
- Products / categories / SKUs
- Sales channels: online, retail, distributors, marketplaces
- Regions and points of sale
- Customer segments: new vs repeat, wholesale vs retail
- Promotions and discounts (effect of campaigns during and after the period)
- Suppliers and supply terms
How to visualize it on a dashboard
- Bar or area charts of gross profit by period with a gross margin, % line
- Waterfall: contribution of price, volume, mix, discounts, and cost of sales to the change in margin
- Heat map by SKU/category to identify high- and low-margin zones
- Plan vs actual with "minimum – norm – target" thresholds
- Breakdown by channel/region to find growth opportunities
How to set targets
Targets are based on unit economics: pricing strategy, target cost of sales, expected sales mix, and the marketing calendar. Take into account seasonality, changes in purchase prices, and currency risks. It makes sense to set both the gross profit amount and gross margin, %: this brings discipline to pricing and promotions.
Common mistakes
- Including VAT in revenue or ignoring returns and bonuses
- Mixing up produced and sold goods (only what was sold should be counted)
- Inconsistent inventory valuation between periods
- Incorrect accounting for logistics, defects, and write-offs (understated cost of sales)
- Comparing unequal periods or different currencies without conversion
Questions for discussion
- What was the key driver of the change in gross profit: price, volume, mix, or cost of sales?
- Which categories or SKUs are consistently "in the red," and why?
- Where can we raise prices or revise promotions without losing volume?
- Which suppliers do we need to renegotiate terms and prices with?
- Is the margin buffer sufficient to cover operating expenses and investments?