How to calculate gross profit (formula included)
Find out how to calculate gross profit, and how this figure can help you get a deeper understanding of your business health.
When you learn how to calculate gross profit, you’ll unlock an important metric that can tell you a lot about the wellness of your business.
Unlike net revenue, gross profit can tell you how much your business is making after you’ve spent what’s necessary to manufacture your products.
If you’re new to the idea of gross profit, this article will explain what it is, how to calculate it, and why it’s important for your business.
Table of Contents
#.What is Gross Profit?
Gross product is the amount you earn from sales, once you subtract your cost of goods sold (CoGS), discounts, and refunds.
Some people augment their gross profit by also calculating what’s known as gross profit after advertising cost (GPAAC). This figure includes the expenses you invest in marketing and converting new customers or retaining existing customers.
Gross profit formula
Gross profit = Net revenue – Cost of Goods Sold
To fill out your own gross profit formula, you’ll need to gather a few other figures from your business.
The first figure you’ll need is your gross revenue—the total sales you made in any given period, without subtracting anything like expenses or cost of goods.
For example, if you sell a product for $200, your gross revenue from that product would simply be $200, even if you spend $125 to make said product.
This figure refers to the “bottom line” your company earns, after you have subtracted out the discounts, returns, and any commissions you pay on your products.
You can use this formula:
Gross revenue = Total sales – (Discounts + Returns + Commissions)
For example, let’s say your gross revenue over a 6-month period was $50,000. However, you spent $18,000 on returns and discounts. Your net revenue would be $32,000.
Cost of goods sold (CoGS)
Finally, you’ll need to calculate your cost of goods sold—essentially, how much it costs you as a business to make the products you sell.
Note that CoGS is not the same thing as operating expenses or fixed costs—things like how much you pay employees or what you pay in rent for your offices.
When calculating CoGS, consider:
- The cost of materials
- Labor expenses to produce products
- Credit card and payment fees you pay
- Equipment necessary to manufacture products
- Production site expenses (like electric bills, etc.)
Once you have calculated all three of these figures over the same time period, bring them all together in the formula above, and voila– you have everything you need to calculate gross profit.
Gross Margin vs. Gross Profit: What’s the difference?
We’re going to discuss the benefits of understanding your gross profit, but before we do, there’s another term that you should understand: Gross margin.
Gross margin vs gross profit can be tricky to understand, because both figures measure how much revenue your company makes after removing CoGS.
The difference is that gross profit gives you a fixed dollar amount, while gross margin gives you a ratio or percentage.
Note the subtle difference in how you calculate gross margin vs. gross profit:
Gross margin formula
|Gross Margin Formula||Gross Profit Formula|
|Gross margin = Revenue – CoGS
|Gross profit = Net revenue – Cost of Goods Sold|
The main benefit of calculating gross margin is that it makes it easy to compare how profitable your business is compared to other companies in the same industry.
NYU published a good study of average gross margins in January of 2022, and we’ve sampled some of that data below:
|Industry||Average Gross Margin|
|Brokerage & Investment Banking||69.46%|
|Business and Consumer Services||31.80%|
|Engineering / Construction||13.45%|
What can you learn from your gross profit?
Once you know your gross profit, you will have a deeper understanding of how efficiently you are producing and selling your products. You’ll be able to see exactly how much revenue you make after you’ve paid to produce the products you sell.
This allows you to find ways to increase efficiency and earn more when it comes to your bottom line.
For example, let’s say you manufacture and sell custom dog toys. Your most popular item, the squeaky hamburger, sells for $6.80. Your slightly less popular rainbow rope toys sell for $6.00.
When you calculate gross profit, you find that you’re spending $4.50 to make each squeaky hamburger, and only $2.00 to make a rainbow rope toy.
That means there’s a big difference between the gross profit of these two items. Your gross profit for the rope toys is $4.00, and the hamburgers only net you $2.30. It’s easy to see how the rope toys are far better for your bottom line at this stage.
Once you know this, you can make a few decisions. Perhaps you decide to raise the cost of the squeaky hamburgers, to compensate for the difference in gross profit. Or maybe you promote the rope toys more in your marketing, to increase sales on one of your most profitable items.
Discovering your gross profit is only one of the many ways data can help you run a leaner, smarter business. Hungry for more? Sign up for our newsletter for our best advice on how Shopify users can use data to improve their bottom line.