Learn About Gross Profit and What it Means for Your Business

Selling your products and services to your customers is nice and all, but if you cannot do it profitably, your organization may not have the wherewithal and longevity to remain in business for long.

There are many profit metrics to grasp and implement as regular metrics for all of your businesses and investments, but the first one to understand before proceeding further is gross profit.

Gross profit is a good indicator of how much profit you have left over after supporting the direct and indirect costs tied to your revenue (i.e., the cost of goods or services you produce or provide to your customer base).

The costs of revenue for your organization can vary, and we will dive a bit into examples of each of these, but we want to leave reading this article with a fulsome, thorough understanding of the importance of gross profit as another fundamental metric to monitor.

Defining Gross Profit, Learning Why it is Important, and Explaining it in Simple Terms

Gross profit in its simplest definition are the profit / earnings left over after covering or deducting the costs of revenue.

As mentioned in the introduction, these costs of revenue can vary from wages of certain employees or contractors that are directly tied to supporting delivery of goods / services / products to customers or to materials that directly go into the goods and services you sell to customers.

These are typically known as “cost of goods sold” or as mentioned, “cost of revenue” on a company’s income statement. Deducting these directly from the revenue leads to gross profit.

This metric is essential as it is the first of many profit indicators to implement with a business to better understand how profitable (or unprofitable) certain activities are for the organization.

It represents how directly profitable a revenue stream is for a company, as it accounts for the costs related to that revenue.

In plain terms, gross profit can be best explained in this example: you purchase materials to produce what you sell to customers at a markup. What you paid for the materials (i.e., the cost of goods) subtracted from the money you make in the sale to customers (i.e., revenue) is your gross profit.

Now that you are a gross profit genius 🧠, you should work to build on this knowledge by digging deeper into how gross profit can vary by industries and companies you evaluate (i.e., a technology company has a much different gross profit profile vs. a manufacturing company; a smaller, early-stage company also has a varied gross profit profile vs. a multi-billion, international, mature company).

Apply Your Learnings Here from Gross Profit Into Your Businesses and Investments with Valuate

Valuate is here to provide you with the insight, tools, and knowledge to give you a good, fundamental background on key metrics like gross profit, as well as connecting these metrics to meaningful business actions.

Our platform (download here) is purpose-built to make sure you and the rest of your organization work in unison with the right data connected to the right business tasks and actions to drive change and improvement across your organization

Insight into metrics like gross profit should be accessible to all - that’s why Valuate is here through this newsletter, through our platform, and through all of our content and subject matter expertise to give you the knowledge you need to run and grow your business and tie it to data and financial information that matter.

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See you all next time to learn more about another important, fundamental metric for your business! 🤑💪