Gross Profit: Definition, Formula, and Why It Matters

Why does anyone start a business? To make money, right? But here is the thing — if your business is not making a profit, or worse, if it is losing money, it will not survive for long. Whether your business succeeds or slowly fades away depends heavily on how much profit it generates. And that is exactly why understanding profit calculations is so important.

Now, there are three main profit indicators in any business. The very first one — and probably the most fundamental — is gross profit. It tells you how much money you are actually making from your core activity, which is buying and selling products. Today, we are going to understand what gross profit really means, how to calculate it properly, and why it is so important for your business.

Gross profit is the initial profit your business earns from its buying and selling operations. In simple words, it is what is left after you subtract the cost of the goods you sold from the total revenue you earned by selling them.

Let me give you a quick example. Say you buy a product for 60 taka and spend another 10 taka to transport it to your shop. So your total cost for that product — what we call the Cost of Goods Sold or COGS — is 70 taka. Now you sell that product for 100 taka. Your gross profit is 100 minus 70, which is 30 taka. Simple as that.

How to Calculate Gross Profit

The formula is straightforward:

Gross Profit = Revenue (Sales) - Cost of Goods Sold (COGS)

To use this formula, you need to know two things:

1. Revenue (Sales) — This is the total money that comes in from selling your products. But keep in mind, you should subtract any product returns and discounts from this number first.

2. Cost of Goods Sold (COGS) — This includes all the costs directly related to selling the product. Things like the purchase price of the goods, transportation costs, and wages for workers involved in the production or delivery.

Let us do a bigger example. Say in the month of June, your total sales were 4,00,000 taka. Your COGS — which includes product purchases, transportation, and wages — came to 3,20,000 taka.

Gross Profit = 4,00,000 - 3,20,000 = 80,000 taka.

So from 4,00,000 taka worth of product sales, your gross profit is 80,000 taka. That is the money you have earned purely from the buying and selling activity — before any office rent, electricity bills, or salaries come into play.

Gross Profit vs. Net Profit

This is where a lot of people get confused, so let us clear it up. Gross profit is not your final profit. It is just the first layer.

When you subtract COGS from your revenue, you get gross profit. But your business has other expenses too — office rent, electricity, internet, employee salaries, marketing costs, loan interest, and so on. When you subtract all these operating expenses from your gross profit, what you are left with is net profit. Net profit is the real, final profit of your business.

Think of it this way — gross profit tells you if your core product business is working. Net profit tells you if your entire business, including all its overhead, is actually making money.

The whole reason you are running a business is to make a profit. And if you want the business to survive and grow, there is no alternative to increasing that profit. Here is the key insight — the higher your gross profit, the higher your net profit will be too. It is a chain reaction.

But there is another reason gross profit is so valuable. It acts as an early warning system. If your gross profit is declining — either in amount or as a percentage of sales — it means something in your core operations is not working right. Maybe your purchase costs have gone up. Maybe you are giving too many discounts. Maybe your transportation expenses are eating into your margins. Whatever the cause, a falling gross profit is the first signal that something needs to be fixed.

In other words, gross profit gives you the earliest and clearest picture of your business health. If there is a problem, gross profit will show it to you before it becomes a bigger issue.

Running a profitable business requires every part of the operation to work in balance. But for businesses that buy and sell products, the buying and selling process is the most critical part. Because that is where it gets decided whether you are going to make money or lose it.

When this core process is managed well, your business earns a healthy gross profit. And a healthy gross profit means a better net profit at the end of the day. So the next time you look at your business numbers, start with gross profit. It is the foundation that everything else is built on.