Business Glossary
What Is Gross Profit?
Gross profit is the money remaining from revenue after deducting direct costs of producing or delivering your product. It is the pool from which all overheads and profit must be funded. Without sufficient gross profit, a business cannot cover its costs regardless of revenue.
The Formula
Gross Profit = Revenue − Cost of Goods Sold (COGS)
Worked Example — UK SME
A UK distribution business: revenue £680,000, direct costs £516,800. Gross profit = £163,200. This must cover staff, rent, marketing, admin, and provide profit.
UK Benchmark
📊 Gross profit must exceed total overheads for the business to be profitable. £163,200 gross profit with £148,000 overheads gives £15,200 net profit (2.2%). The same with £120,000 overheads gives £43,200 (6.4%).
Common Questions
What is the difference between gross profit and gross margin?
Gross profit is an absolute figure (£163,200). Gross margin is the percentage of revenue (24%). Gross profit shows absolute amounts; gross margin enables comparison across businesses of different sizes.
Why can a business be profitable but run out of cash?
Because profit and cash are different. £40,000 gross profit can coexist with £95,000 tied up in debtors. The profit exists on the P&L but not in the bank.
How do I increase gross profit without raising prices?
Improve product mix, reduce direct costs through better supplier terms, reduce waste, improve landed cost calculations, reduce returns and defects.
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