Gross Profit

Gross profit is revenue minus the cost of the products or services sold. It shows what remains after those costs, before further costs such as administration and sales are deducted. It is a first step on the way to profit.

Production costs include not only materials and directly attributable labour but also related production overheads, such as running and depreciating manufacturing equipment. For service businesses, the relevant costs are those of delivering the service.

A reliable comparison needs to show which costs each company includes. If one provider includes production wages here while another records them among other operating expenses, their reported gross profits are not directly comparable. Key drivers are selling prices, material prices, product mix and production utilisation. Higher revenue therefore does not automatically increase gross profit in the same proportion. Its value lies above all in the trend and in the breakdown: it shows which products, customers or channels make any positive contribution at all before the remaining operating expenses are deducted, and is therefore the basis for portfolio and pricing decisions.

In trading companies it corresponds broadly to the margin between selling price and cost of goods and is the central management measure there, because revenue alone says little given thin margins. In growth business models it is the reference for metrics such as customer lifetime value, because only gross profit is genuinely available to cover acquisition costs and overheads. Viewing the figure per order or per customer is often more informative than the total, because it shows which orders should be accepted at all. In sectors with scarce capacity, contribution per unit of capacity additionally governs. The treatment of discounts, rebates and freight also deserves attention, since these reduce actual gross profit but are frequently recorded elsewhere in the accounts and therefore disappear in the result.