Gross Profit Formula: What It Is and How to Use It [2025]

In this article, we’ll explain the gross profit formula, give an example, and show why it matters for any business.

Gross profit is a key number that helps businesses see how much money they make after covering the direct costs of their products or services. Understanding how to calculate gross profit can help businesses set prices, track success, and make smarter financial choices. 

What Is Gross Profit?

Gross profit is the amount of money a business keeps after paying for the direct costs of making or buying its products. These costs, called the cost of goods sold (COGS), include things like raw materials, labor, and manufacturing. Gross profit doesn’t include expenses like rent, advertising, or office supplies—those are separate costs.

What Is the Gross Profit Formula?

The formula for gross profit is:

Gross Profit = Revenue – Cost of Goods Sold (COGS)

Where:

• Revenue is the total amount of money a business makes from sales.
• COGS includes all direct costs of making or purchasing the goods sold.

Gross profit is a dollar amount, not a percentage. It shows how much money remains after covering direct production costs but before paying for other expenses.

Gross Profit Formula Example 

Let’s say a business earns $500,000 from sales and spends $200,000 on COGS.

Using the formula:

Gross Profit = $500,000 – $200,000 = $300,000

This means the company has $300,000 left to cover other expenses like rent, salaries, and taxes.

Gross Profit vs. Gross Profit Margin 

Gross profit is the total dollar amount left after subtracting COGS, while gross profit margin shows this as a percentage. The formula for gross profit margin is:

Gross Profit Margin = (Gross Profit / Revenue) x 100

Using our example:

Gross Profit Margin = ($300,000 / $500,000) x 100 = 60%

A higher percentage means a business keeps more of its sales revenue as profit, while a lower percentage may indicate higher costs or lower pricing.

Why Gross Profit Matters

• Checks Business Health: Helps see if a company is making enough money.
• Sets Prices Right: Ensures products are priced to cover costs and make a profit.
• Controls Spending: Helps spot areas where costs can be reduced.
• Attracts Investors: A strong gross profit shows a business is financially stable.
• Allows for Comparison to Industry Standards: Helps see if the business is doing better or worse than competitors.

Conclusion: Evaluating Your Gross Profit

Keeping an eye on gross profit helps businesses make better choices, adjust pricing, and improve efficiency. It’s an important measure of financial performance and long-term success. By understanding and tracking gross profit, businesses can make smart changes to increase profits and overall growth.

If you’re looking for ways to increase your gross profit, check out our Marketing Tools!

Additional Gross Profit Formula FAQs