Increasing Gross Profit Increases Your Bottom Line
Gross profit is a company’s total revenue (aka total sales) minus the cost of goods sold. This is the profit a company makes after deducting the costs associated with making and/or selling its products, or the costs associated with providing its services. Gross profit will appear on a company’s income statement (aka Profit and Loss report) or can be calculated with this formula:
Gross profit = revenue – cost of goods sold
Gross profit shouldn’t be confused with operating profit, also known as earnings before interest and tax (EBIT).
Gross profit can be used to calculate the gross profit margin. Expressed as a percentage, this metric is useful for comparing a company’s efficiency over time. Gross profit is expressed as a currency value, gross profit margin as a percentage. The formula for gross profit margin is:
Here is an example of how to calculate gross profit:
|Costs and expenses|
|Cost of sales – Materials||123,516|
|Cost of Sales – Labor||3,004|
|Selling, administrative and other expenses||14,117|
|Total costs and expenses||140,637|
To calculate the gross profit, we first add up the cost of goods sold:
Cost of sales – Materials ($123,516 ) + Cost of Sales – Labor (3,004) = $126,520
We do not include “Selling, administrative and other expenses”. We then subtract the cost of goods sold ($126,520 ) from total revenues ($144,077 ) to obtain a gross profit of $17,557.
Many things can impact your Gross Profit and help you boost your bottom line:
- Increasing revenue by making more sales and/or increasing your selling prices
- Decreasing Cost of Sales by finding cost savings or operating more efficiently.
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