Gross profit is revenue minus cost of goods sold (COGS) — the first profitability line on the income statement. It measures how much a business earns after covering direct production costs before operating expenses, interest, and taxes.
Gross profit is the top-line measure of production efficiency: Revenue minus Cost of Goods Sold (COGS). COGS includes direct labor, raw materials, manufacturing overhead, and inventory costs — anything directly tied to producing the product or service sold. Operating expenses (rent, utilities, salaries for non-production staff, marketing) are subtracted later to arrive at operating profit. For lenders, gross profit provides the first signal of whether a business has room to cover operating costs and service debt. Gross profit can be healthy while net profit is negative if overhead is too high — a common pattern in early-stage businesses scaling operations. Gross profit expressed as a percentage of revenue is gross margin — the more useful comparison metric across businesses and industries. A retail business at 30% gross margin and a SaaS company at 75% gross margin are operating in fundamentally different economic models even if dollar-level gross profit is similar. The IRS defines COGS and gross profit for business tax purposes on Schedule C (https://www.irs.gov/forms-pubs/about-schedule-c-form-1040) and Form 1125-A (https://www.irs.gov/forms-pubs/about-form-1125-a). The Federal Reserve's Small Business Credit Survey (https://www.fedsmallbusiness.org/survey/2024/report-on-employer-firms) reports on small business profitability benchmarks including gross profit margins by industry and sector.
Gross profit deducts only COGS from revenue. Net profit deducts COGS plus all operating expenses (rent, salaries, marketing, G&A), interest, and taxes. A business can have strong gross profit but negative net profit if overhead is high — a common pattern in growth-stage companies.
COGS includes direct materials, direct labor, and manufacturing overhead tied to producing the product or service sold. NOT included in COGS: rent, utilities, marketing spend, executive salaries, insurance, or other operating overhead. For service businesses, COGS is often direct labor and subcontractor costs.