Gross profit refers to the difference between a company’s sales revenue and the direct costs incurred in manufacturing or providing the products or services sold.
It shows how much money remains, after deducting direct production or procurement costs, to cover other operating expenses and generate profits.
The calculation is carried out using the following formula:
\text{Gross Profit} = \text{Turnover} – \text{Cost of goods sold}
Direct costs (Cost of Goods Sold, COGS) include, for example:
- Cost of materials
- Cost of goods purchased
- Manufacturing wages
- directly attributable production costs
- certain delivery and manufacturing costs
Gross profit is a key performance indicator for:
- to assess the profitability of the core business
- To evaluate production and procurement processes
- Review pricing strategies
- to lay the foundations for further profit indicators
- to analyse the trend in profitability
A high gross profit suggests that, after deducting direct costs, a company has greater financial scope to cover operating costs, make investments and generate profits.
Gross profit is often considered alongside the gross margin. Whilst gross profit represents an absolute value, the gross margin shows the percentage of gross profit as a proportion of turnover.
For start-ups and high-growth companies, gross profit is a key metric for assessing the viability of the business model and the scalability of value creation. innoWerft supports founders in understanding key financial indicators, analysing their profitability and building sustainable growth strategies on a solid economic foundation.