What is Gross Profit?
Gross profit is the remaining revenue after deducting the costs associated with producing a company’s products or services in an accounting period. For example, if a company accrued $100,000 in revenue in an accounting period and their COGS was $20,000, the company’s gross profit would be $80,000.
The formula for calculating gross profit is shown below:
Gross Profit = Revenue – Cost of Goods Sold
Gross Profit in Business
Gross profit is vital to a business when reflecting over an accounting period analytically. By having a large gross profit in comparison to a small cost of goods sold, an analyst can interpret that the company is doing well and plan ways to further reduce cost of goods sold while increasing gross profit for future accounting period. If a company’s gross profit and COGS are almost equal, a company can try to reduce COGS by finding more cost-effective ways in producing their products or services. Examples of this could be finding a different supplier or manufacturer to reduce the costs of producing a product or outsourcing part of a company’s service to someone overseas.
