Gross Profit

Gross profit shows how much money is left from sales after paying the direct costs of making or buying the goods sold. It works because revenue is the total money earned from sales, and COGS includes only the costs directly tied to those sales, so subtracting COGS isolates the amount available to cover operating expenses and profit. A higher gross profit generally means the business keeps more from each sale before overhead costs are considered.

Use this formula when you want to measure the profitability of sales before rent, salaries, marketing, and other operating expenses. It is commonly used in product-based businesses, retail, manufacturing, and any situation where you need to compare sales income with the direct cost of those sales.

• Subtracting operating expenses as well as COGS
• Using total sales costs that include indirect expenses instead of only direct costs
• Mixing up gross profit with net profit