Gross profit is the first profit figure on the income statement: revenue minus cost of sales. It shows how much a business keeps from selling its goods or services once the direct cost of those goods or services is covered, before any overheads.
What it means
Gross profit isolates the margin on the core trading activity. A business selling R 1 000 000 of goods that cost R 600 000 to produce or buy has a gross profit of R 400 000, a 40% gross margin. It does not yet account for rent, admin salaries, interest or tax - those come further down the statement.
Where it fits in
Direct production labour can sit in cost of sales, so a slice of payroll cost reduces gross profit, while admin and support salaries fall below it as operating expenses. Watching gross margin tells a business whether its pricing and direct costs, including direct labour, are healthy.
Key rules
- Gross profit equals revenue less cost of sales.
- It is struck before operating expenses, interest and tax.
- Direct labour in cost of sales reduces it; overhead salaries do not.
- Gross margin is gross profit as a percentage of revenue.
