{"id":11258,"date":"2024-04-30T09:27:28","date_gmt":"2024-04-30T13:27:28","guid":{"rendered":"https:\/\/www.sage.com\/en-ca\/blog\/?p=11258"},"modified":"2026-01-15T11:23:38","modified_gmt":"2026-01-15T16:23:38","slug":"what-is-gross-profit","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-ca\/blog\/what-is-gross-profit\/","title":{"rendered":"What is gross profit and how to calculate it"},"content":{"rendered":"<header class=\"entry-header has-dark-background-color entry-header--has-illustration entry-header--has-illustration--generic\">\n\t<div class=\"container\">\n\t\t<div class=\"entry-header__row row align-center\">\n\t\t\t<div class=\"col col-lg-7 col-xlg-6 entry-header__content\">\n\t\t\t\t\t\t\t<div class=\"component component-single-header\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"entry-header__misc text--subtitle text--uppercase text--small\">\n\t\t\t\t\t\t\t<a href=\"https:\/\/www.sage.com\/en-ca\/blog\/category\/money-matters\/\" class=\"entry-header__link\">Money Matters<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t<div class=\"entry-title-wrapper\">\n\t\t\t\t\t<h1 class=\"entry-title\">\n\t\t\t\t\t\tWhat is gross profit and how to calculate it\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t<p class=\"entry-header__description\">\n\t\t\t\t\t\t\t\t\t\t\t<\/p>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t<div class=\"single-post-details container\">\n\t\t<div class=\"col\">\n\t\t\t<span class=\"posted-on \"><time class=\"entry-date published\" datetime=\"2024-04-30T09:27:28-04:00\">April 30, 2024<\/time><\/span><span class=\"reading-time\"> min read<\/span>\n\t\t<button\n\t\t\ttype=\"button\"\n\t\t\tclass=\"social-share-button button button--icon button--secondary js-social-share-button\"\n\t\t\tdata-share-title=\"What is gross profit and how to calculate it\"\n\t\t\tdata-share-url=\"https:\/\/www.sage.com\/en-ca\/blog\/what-is-gross-profit\/\"\n\t\t\tdata-share-text=\"Please read this interesting article\"\n\t\t>\n\t\t\t<span class=\"social-share-button__share-label\">Share<\/span>\n\t\t\t<span class=\"social-share-button__copy-label\" hidden>Copy Link<\/span>\n\t\t\t<span class=\"social-share-button__copy-tooltip\" aria-hidden=\"true\" hidden>Copied<\/span>\n\t\t<\/button>\n\n\t\t\t\t<\/div>\n\t<\/div>\n<\/header>\n\n\n\n<div class=\"wp-block-post-author\">\n\t\t\t<div class=\"co-authors\">\n\t\t\t\n\t\t<div class=\"entry-author-wrapper\">\n\t\t\t<a class=\"entry-author\" href=\"https:\/\/www.sage.com\/en-ca\/blog\/author\/ryangrundy\/\">\n\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"40\" height=\"40\" src=\"https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2023\/02\/Ryan-Grundy.jpg\" class=\"entry-author__image\" alt=\"\" \/>\t\t\t\t<span class=\"entry-author__name\">Ryan Grundy<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t<\/div>\n\t\t<\/div>\n\n\n\n\n\n<p>Gross profit should be an easy figure to calculate but its definition can give people a problem. <\/p>\n\n\n\n<p>However, if you want to get the rest of your figures right, this one comes first and it\u2019s a crucial building block for you.<\/p>\n\n\n\n<p>Gross profit is one of those great figures that gives you a quick snapshot of how your business is doing. <\/p>\n\n\n\n<p>It\u2019s a rough guide, if you like, on your company\u2019s performance and status, and it\u2019s very useful.<\/p>\n\n\n\n<p>However, arriving at the figure can cause some confusion. It also doesn\u2019t give the overall picture of how your company is performing, so some caution needs to be observed.<\/p>\n\n\n\n<p>Getting a gross profit figure is, on the basic level, very easy to calculate.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-here-s-what-we-ll-cover-in-this-article\">Here&#8217;s what we&#8217;ll cover in this article<\/h4>\n\n\n<?xml encoding=\"utf-8\" ?><div class=\"wp-block-yoast-seo-table-of-contents yoast-table-of-contents\"><ul><li><a href=\"#definition\" data-level=\"2\">Definition of gross profit<\/a><\/li><li><a href=\"#how\" data-level=\"2\">How gross profit is calculated (gross profit formula)<\/a><\/li><li><a href=\"#importance\" data-level=\"2\">Importance of gross profit<\/a><\/li><li><a href=\"#issues\" data-level=\"2\">Issues when working out gross profit<\/a><\/li><li><a href=\"#net\" data-level=\"2\">Net p rofit<\/a><\/li><li><a href=\"#get\" data-level=\"2\">Get your calculations right<\/a><\/li><li><a href=\"#final\" data-level=\"2\">Final thoughts<\/a><\/li><\/ul><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"definition\"><strong>Definition of gross profit<\/strong><\/h2>\n\n\n\n<p>The definition of gross profit is that it is the amount of money left minus the cost of goods sold (COGS).<\/p>\n\n\n\n<p>It also includes costs associated with manufacture of products to sell, over a certain time, such as:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>monthly<\/li>\n\n\n\n<li>quarterly <\/li>\n\n\n\n<li>yearly<\/li>\n<\/ul>\n\n\n\n<p>This is an accurate indicator of profit or loss during the particular period of time. Production and manufacturing costs have been removed, showing the remaining funds available.<\/p>\n\n\n\n<p>A gross profit calculation is needed to get to the net profit amount where further deductions are made to take into account tax, and other outgoings.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how\"><strong>How gross profit is calculated (gross profit formula)<\/strong><\/h2>\n\n\n\n<p>This gross profit formula shows you how to calculate gross profit:<\/p>\n\n\n\n<p><strong>Total revenue from sales \u2013 Cost of goods and services sold = Gross profit<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"importance\"><strong>Importance of gross profit<\/strong><\/h2>\n\n\n\n<p>Gross profit is important to calculate your profit margin as it provides a snapshot of your production costs. <\/p>\n\n\n\n<p>It&#8217;s the first part of a <a href=\"https:\/\/www.sage.com\/en-ca\/blog\/checklist-create-and-use-a-profit-and-loss-pl-statement\/\" target=\"_blank\" rel=\"noreferrer noopener\">profit and loss statement<\/a> needed to calculate the overall financial health of your business.<\/p>\n\n\n\n<p>If your profit margin is low, it could indicate problems. <\/p>\n\n\n\n<p>For instance, you might be paying too much for certain parts of your production chain, or not charging customers enough for the products after a rise in cost of goods for manufacture.<\/p>\n\n\n\n<p>Gross profit can fluctuate according to external sources like inflation, supply-chain issues, and shifts in the global economy.<\/p>\n\n\n\n<p>It&#8217;s important to understand the economic context of a low profit margin and be agile enough to weather these problems over time.<\/p>\n\n\n\n<p>If your profit margin is high, this could provide evidence to your leadership team and potential investors that you are running a healthy business.<\/p>\n\n\n\n<p>However, in recent years and since the pandemic, criticism has been heaped onto businesses that pass on external factor costs to the customers. <\/p>\n\n\n\n<p>Praise has been given to those businesses that absorb the extra costs. Their products remain affordable amid a global cost-of-living crisis.<\/p>\n\n\n\n<p>As a business owner, you will have to decide what is important to you, your business, and your customers. <\/p>\n\n\n\n<p>They may be willing to pay a bit more for a quality product, but not for items they can get cheaper elsewhere.<\/p>\n\n\n\n<div class=\"single-cta gated-content\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">See your business finances clearly<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p><!-- wp:paragraph --><\/p>\n<p class=\"\">Download our balance sheet template to summarize your business finances in minutes<\/p>\n<p><!-- \/wp:paragraph --><\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-afc23ad4-c4b6-4331-aa7c-b7af3c922a89\"\n\t\t\t\t\t\tclass=\"single-cta__button button button--primary\"\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t>Get it now<\/a>\n\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<img decoding=\"async\" width=\"1440\" height=\"810\" src=\"https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2023\/03\/GettyImages-1261583718-1-1440x810.jpg\" class=\"single-cta__image\" alt=\"people in office\" loading=\"lazy\" srcset=\"https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2023\/03\/GettyImages-1261583718-1-1440x810.jpg 1440w\" sizes=\"auto, (min-width: 48em) 33vw, 100vw\" \/>\t\t\t<\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"issues\"><strong>Issues when working out gross profit<\/strong><\/h2>\n\n\n\n<p>The confusion can first arrive because different businesses call their sales various things. <\/p>\n\n\n\n<p>The main three being:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>sales<\/li>\n\n\n\n<li>turnover<\/li>\n\n\n\n<li>revenue<\/li>\n<\/ul>\n\n\n\n<p>For small businesses, the best term to use is \u201csales\u201d\u2013referring what your company actually sells.<\/p>\n\n\n\n<p>The word \u201cturnover\u201d is often used by larger companies because it might incorporate sales of products. It may include other things such as recurring income (items billed every month), which are sales of course but can be defined in a slightly different way.<\/p>\n\n\n\n<p>\u201cRevenue\u201d is a term more commonly used in the US. <\/p>\n\n\n\n<p>It\u2019s the same as \u201csales\u201d, although professional firms are bigger users of this term as they believe it better reflects their business than just the term \u201csales\u201d.<\/p>\n\n\n\n<p>However, whatever term you use, it comes down to what your company does to generate its cash. <\/p>\n\n\n\n<p>It\u2019s the money you take, minus the money it costs to get the things that make you your money.<\/p>\n\n\n\n<p>If you\u2019re selling cans of cola, for example, your gross profit is the amount of money you take from your customers minus the amount it cost to buy the cans. <\/p>\n\n\n\n<p>Thus, if the retail price is $1 and you buy the cans from a wholesaler at $0.50, then your gross profit is $0.50.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"net\"><strong>Net p<\/strong>rofit<\/h2>\n\n\n\n<p>Now, don\u2019t forget that gross profit can also be a loss. <\/p>\n\n\n\n<p>So, if you\u2019re having a bad day and you\u2019ve had to sell your cans of cola for $0.50, the same as you bought them for, then you are at a net position. <\/p>\n\n\n\n<p>If you had to sell them for $0.40, you are looking at a loss of $0.10 per can. <\/p>\n\n\n\n<p>Not a good place to be.<\/p>\n\n\n\n<p>Ok so far? But the reason this gross profit figure is so important is that from here, your other figures are built.<\/p>\n\n\n\n<p>If you want to figure out net profits (arguably the key indicator of a company\u2019s performance), then you take sales, minus the direct costs (as above). <\/p>\n\n\n\n<p>From that figure, take away indirect costs (everything else that is a cost to your business\u2013so rent, staff costs, postage, etc).<\/p>\n\n\n\n<p>So, taking the number of cans of cola you sell in a year, take away from that the cost of those cans of cola from the wholesaler. <\/p>\n\n\n\n<p>Then take from that the other costs that have allowed you to sell the cola in the first place (rent of your shop, utilities, transport, etc).<\/p>\n\n\n\n<p><strong>Read more: <a href=\"https:\/\/www.sage.com\/en-ca\/blog\/glossary\/what-is-net-profit\/\" target=\"_blank\" rel=\"noreferrer noopener\">What is net profit?<\/a><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"get\"><strong>Get your calculations right<\/strong><\/h2>\n\n\n\n<p>The thing to remember is that gross profit is sales minus direct costs, not sales minus every cost. <\/p>\n\n\n\n<p>Keep that in mind and you will be able to come to a gross profit figure every time.<\/p>\n\n\n\n<p>Remember, gross profit is your first calculation.<\/p>\n\n\n\n<p>You need to get that calculation right, otherwise your profit and loss account will not work. You will not be getting the correct information about your business.<\/p>\n\n\n\n<figure data-wp-context=\"{&quot;imageId&quot;:&quot;69d59b16b96ad&quot;}\" data-wp-interactive=\"core\/image\" data-wp-key=\"69d59b16b96ad\" class=\"wp-block-image size-large wp-lightbox-container\"><img loading=\"lazy\" decoding=\"async\" width=\"1440\" height=\"659\" data-wp-class--hide=\"state.isContentHidden\" data-wp-class--show=\"state.isContentVisible\" data-wp-init=\"callbacks.setButtonStyles\" data-wp-on--click=\"actions.showLightbox\" data-wp-on--load=\"callbacks.setButtonStyles\" data-wp-on-window--resize=\"callbacks.setButtonStyles\" src=\"https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2024\/04\/What-is-Gross-Profit-Image-1440x659.jpg\" alt=\"\" class=\"wp-image-11260\" srcset=\"https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2024\/04\/What-is-Gross-Profit-Image-1440x659.jpg 1440w, https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2024\/04\/What-is-Gross-Profit-Image-768x351.jpg 768w, https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2024\/04\/What-is-Gross-Profit-Image.jpg 1511w\" sizes=\"auto, (max-width: 1440px) 100vw, 1440px\" \/><button\n\t\t\tclass=\"lightbox-trigger\"\n\t\t\ttype=\"button\"\n\t\t\taria-haspopup=\"dialog\"\n\t\t\taria-label=\"Enlarge\"\n\t\t\tdata-wp-init=\"callbacks.initTriggerButton\"\n\t\t\tdata-wp-on--click=\"actions.showLightbox\"\n\t\t\tdata-wp-style--right=\"state.imageButtonRight\"\n\t\t\tdata-wp-style--top=\"state.imageButtonTop\"\n\t\t>\n\t\t\t<svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"12\" height=\"12\" fill=\"none\" viewBox=\"0 0 12 12\">\n\t\t\t\t<path fill=\"#fff\" d=\"M2 0a2 2 0 0 0-2 2v2h1.5V2a.5.5 0 0 1 .5-.5h2V0H2Zm2 10.5H2a.5.5 0 0 1-.5-.5V8H0v2a2 2 0 0 0 2 2h2v-1.5ZM8 12v-1.5h2a.5.5 0 0 0 .5-.5V8H12v2a2 2 0 0 1-2 2H8Zm2-12a2 2 0 0 1 2 2v2h-1.5V2a.5.5 0 0 0-.5-.5H8V0h2Z\" \/>\n\t\t\t<\/svg>\n\t\t<\/button><\/figure>\n\n\n\n<p>For example, if you are selling cans of beer. <\/p>\n\n\n\n<p>It will be the cost of making those cans of beer, so that is a direct cost. So, you would have your total sales less your direct costs equals your gross profit.<\/p>\n\n\n\n<p>This gross profit figure is really important. You deduct your overheads to discover your net profit figure.<\/p>\n\n\n\n<p><strong>Read more: <a href=\"https:\/\/www.sage.com\/en-ca\/blog\/glossary\/calculation-of-profit\/\" target=\"_blank\" rel=\"noreferrer noopener\">How to calculate profit<\/a><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"final\">Final thoughts<\/h2>\n\n\n\n<p>Calculating gross profit doesn\u2019t have to be complicated. <\/p>\n\n\n\n<p>Follow the steps in this article and you\u2019ll gain useful clarity over your business financial strength.<\/p>\n\n\n<div class=\"single-cta\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">Subscribe to the Sage Advice Newsletter<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p class=\"cta-content__title\">Get a roundup of our best business advice in your inbox every month.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-8949a954-88b2-43bb-8b8a-77c53eb34350\"\n\t\t\t\t\t\tclass=\"single-cta__button button button--primary\"\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t>Subscribe<\/a>\n\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<img decoding=\"async\" width=\"1440\" height=\"810\" src=\"https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2022\/04\/GettyImages-1073797282-1440x810.jpg\" class=\"single-cta__image\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2022\/04\/GettyImages-1073797282-1440x810.jpg 1440w\" sizes=\"auto, (min-width: 48em) 33vw, 100vw\" \/>\t\t\t<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Discover what gross profit is and how to calculate it for a snapshot of your business finances.<\/p>\n","protected":false},"author":1398,"featured_media":8195,"menu_order":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_sage_video":false,"post_featured_image_hide":false,"footnotes":""},"categories":[7],"tags":[271,265],"business_type":[3],"lilypad":[],"context":[],"industry":[],"persona":[73,83],"imagine_tag":[67],"coauthors":[313],"class_list":["post-11258","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-money-matters","tag-cash-flow","tag-how-to-grow-your-business","business_type-small-business"],"sage_meta":{"region":"en-ca","author_name":"Ryan Grundy","featured_image":"https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2022\/04\/GettyImages-734165167.jpg","imagine_tags":{"67":"Small business"}},"distributor_meta":false,"distributor_terms":false,"distributor_media":false,"distributor_original_site_name":"Sage Advice Canada English","distributor_original_site_url":"https:\/\/www.sage.com\/en-ca\/blog","push-errors":false,"_links":{"self":[{"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/posts\/11258","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/users\/1398"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/comments?post=11258"}],"version-history":[{"count":0,"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/posts\/11258\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/media\/8195"}],"wp:attachment":[{"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/media?parent=11258"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/categories?post=11258"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/tags?post=11258"},{"taxonomy":"business_type","embeddable":true,"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/business_type?post=11258"},{"taxonomy":"lilypad","embeddable":true,"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/lilypad?post=11258"},{"taxonomy":"context","embeddable":true,"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/context?post=11258"},{"taxonomy":"industry","embeddable":true,"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/industry?post=11258"},{"taxonomy":"persona","embeddable":true,"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/persona?post=11258"},{"taxonomy":"imagine_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/imagine_tag?post=11258"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/www.sage.com\/en-ca\/blog\/api\/wp\/v2\/coauthors?post=11258"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}