Understanding gross profit is essential for every business—regardless of industry, size, or structure. It’s one of the most important metrics for measuring profitability and operational efficiency. Yet, many businesses overlook the impact of small decisions on gross profit margins, or worse, calculate them incorrectly.
In this article, we’ll break down the gross profit formula, show you how to use it, and explore actionable ways to improve your profit margins over time.
What is gross profit?
Gross profit is the amount of revenue a company retains after subtracting the cost of goods sold (COGS). It tells you how efficiently a business is producing and delivering its products or services. Unlike net profit, gross profit doesn’t include indirect expenses like rent or admin costs—it focuses purely on production efficiency.
Gross profit formula explained
The gross profit formula is:
Gross Profit = Revenue – Cost of Goods Sold (COGS)
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Revenue: The total sales earned from goods or services before expenses.
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COGS: Direct costs tied to production—like raw materials, packaging, and direct labour.
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What is gross profit margin?
Gross profit margin expresses gross profit as a percentage of total revenue:
Gross Profit Margin (%) = (Gross Profit / Revenue) x 100
It shows how much money you retain for every dollar of revenue after paying for production.
Why gross profit matters
How to calculate gross profit: A step-by-step example
Let’s say your business sells custom office furniture:
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Revenue: $120,000
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COGS: $72,000
Gross Profit = $120,000 – $72,000 = $48,000
Gross Profit Margin = ($48,000 / $120,000) x 100 = 40%
This means 40% of your revenue is available to cover overheads, reinvest in the business, or distribute as profit.
Common mistakes in calculating gross profit
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Incorrect expense classification: Including admin costs or rent in COGS.
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Missing hidden costs: Overlooking shipping, packaging, or production-related tools.
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Overstating revenue: Failing to adjust for discounts, returns, or cancelled sales.
How to improve gross profit margins
Boosting gross profit doesn’t necessarily require raising prices. Some practical approaches include:
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Negotiating better rates with suppliers
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Reducing raw material waste
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Improving production processes or automation
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Upselling higher-margin items
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Regularly reviewing pricing strategies
The role of financial systems in monitoring profit
A robust financial management system helps track gross profit with accuracy and efficiency. Businesses can:
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Monitor revenue and COGS in real time
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Run reports by product, category, or department
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Detect margin erosion early
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Export accurate reports for financial planning
How Budgetly helps finance teams improve profitability
Budgetly supports profitability through better visibility and control of operational spend.
With a budget management solution like Budgetly, finance teams can:
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Track team and departmental spend in real time
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Set spending limits tied to specific categories like COGS
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Automatically categorise and match receipts to expenses
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Export clean data to accounting platforms for accurate financial statements
By eliminating manual admin and surfacing spend insights quickly, Budgetly empowers businesses to act sooner, stay within budget, and protect profit margins.
Wrapping up: Turning numbers into actionable insights
Gross profit is a powerful indicator of business health. Calculating it correctly and monitoring it consistently allows teams to make informed decisions and take proactive steps to strengthen margins.
If you're looking for more control over business spend and simpler processes for managing costs, Budgetly can help you gain clarity and confidence over your numbers.
Schedule a demo with us today, or watch a 10-minute recorded demo!
