Gross Profit

Gross profit is the amount a business keeps from its total revenue after subtracting the direct costs of producing or delivering its goods and services. Those direct costs - collectively called cost of goods sold (COGS) - include raw materials, direct labor, and any expenses directly tied to completing a job or fulfilling an order. Gross profit does not include rent, administrative salaries, marketing spend, or other operating overheads. Those come out later, when calculating net profit. The figure tells you whether the work itself is priced to sustain the business, before anything else is considered.

The Gross Profit Formula

The formula is: Gross profit = Revenue - Cost of goods sold (COGS).

Revenue is the total income from sales before any deductions. COGS covers only what it costs to produce or deliver what you sold - not the general costs of running the business. For a product business, COGS typically includes materials, stock purchase costs, packaging, and direct production labor. For a service business - an electrical contractor, an AV integrator, a promotional merchandise distributor - COGS includes the labor and materials consumed on each job or order, plus subcontractor fees paid to deliver the work.

The distinction matters because gross profit isolates the core pricing equation. If a construction subcontractor completes a job for £40,000 and the direct materials and labor cost £28,000, their gross profit on that job is £12,000. Whether the business turns a net profit depends on what comes out of that £12,000 next: office costs, vehicles, insurance, and other overheads. Gross profit is the ceiling. Everything else is paid from it.

Gross Profit vs. Gross Margin

Gross profit and gross margin measure the same thing in two different ways. Gross profit is an absolute figure expressed in currency - the pounds left after COGS. Gross margin expresses that figure as a percentage of revenue: (Gross profit / Revenue) x 100.

A business generating £50,000 in revenue with £20,000 in COGS has a gross profit of £30,000 and a gross margin of 60%. The currency figure shows how much is available to cover overheads. The percentage lets you compare performance across different periods, product lines, or jobs regardless of size. For a promotional merchandise distributor quoting orders of very different values, the margin percentage is the more useful number - it shows whether pricing discipline held on a £500 job and a £50,000 order alike.

Gross Profit and Net Profit

Gross profit is not the final profit the business keeps. After gross profit comes a second layer of deduction: operating expenses such as office rent, administrative salaries, vehicle costs, insurance, and software. Subtract those from gross profit and you reach operating profit. Subtract interest and tax, and you arrive at net profit.

A business can show a healthy gross profit and still struggle financially. If a contractor wins work at reasonable margin but carries a large office, expensive vehicles, and significant non-billable payroll, operating expenses can erode the gross profit entirely. Gross profit tells you whether the work is profitable. Net profit tells you whether the whole business is. Tracking both monthly gives you a complete picture before problems compound.