Gross profit is a key financial metric that measures the profitability of a company’s core operations. It represents the difference between revenue (sales) and the cost of goods sold (COGS)—which includes the direct costs of producing or purchasing the products or services the company sells.

The formula for calculating gross profit is:
Gross Profit = Revenue – Cost of Goods Sold

Gross profit appears on a company’s income statement and is an important indicator of how efficiently a business is producing or sourcing its goods. It reflects how much money is left over after covering the direct costs of production but before accounting for other operating expenses like rent, salaries, marketing, or utilities.

A healthy gross profit margin suggests the company is effectively managing production costs and pricing its products properly. A low gross profit could indicate issues with pricing, high material or labor costs, or operational inefficiencies.

Monitoring gross profit helps business owners make strategic decisions, such as adjusting pricing, renegotiating supplier contracts, or improving production processes. It also plays a role in forecasting and budgeting.

In summary, gross profit is a vital financial measure that shows the profitability of a company’s primary business activities before overhead and administrative expenses are considered.