Finance term
Gross Profit
Also known as: gross income
Definition
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.
Detailed explanation
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/reports/survey/2026/2026-report-on-employer-firms) reports on small business profitability benchmarks including gross profit margins by industry and sector.
◈ Worked example
- Revenue $1M, COGS $600K → Gross Profit $400K (40% gross margin)
- Restaurant with $800K revenue, food + labor COGS of $560K → Gross Profit $240K (30% gross margin)
- Software company: $500K revenue, hosting + support COGS $75K → Gross Profit $425K (85% gross margin)
Common questions
The most-asked questions about Gross Profit — answered straightforwardly.
What's the difference between gross profit and net profit? +
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.
What COGS items are included in gross profit? +
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.
Further reading
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