Gross profit.
In plain English
Gross profit equals revenue minus cost of goods sold, and it measures how much a company keeps from each sales dollar before paying rent, salaries, marketing, interest, or taxes. Divided by revenue it becomes gross margin, the number most people compare across companies and across time. Direct costs are the ones that rise and fall with output: materials, production labor, payment processing on each sale. Overhead like corporate salaries and advertising sits below the line in operating expenses. A falling gross margin usually means input costs are climbing or prices are being cut, and the income statement shows which.
01Why it matters
Gross margin sets the ceiling on everything else, because a business keeping thirty cents of every sales dollar has to run itself on that thirty cents, not on the full dollar.
02The math, step by step
Say a coffee shop sells 250,000 dollars in a year and the beans, cups, and milk cost 75,000 dollars. Gross profit is 175,000 dollars and gross margin is 70 percent (175,000 divided by 250,000). Rent, wages, and everything else has to come out of that 175,000 dollars.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Gross profit is not what the owner keeps. It comes before rent, salaries, marketing, interest, and tax. A company can post a healthy gross margin and still lose money every month once operating expenses are subtracted, which is exactly what the lines below gross profit exist to show.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice