Simple Tips by SASA

What is gross profit? 🤑 The definition & tips and tricks for beginners

What is Gross profit?

For a self-employed person, gross profit is the money you make from selling your products or services after subtracting the direct costs it took to produce or deliver them. It shows how much you’re actually making from each sale, before any other business expenses.

Gross Profit Formula ∑

Gross Profit = Total Sales−Cost of Goods Sold (COGS)

Let’s say you're a self-employed artist selling custom prints:

Total Sales: You made $2,000 in sales this month.
Cost of Goods Sold (COGS): It costs you $700 for materials, printing, and shipping.

Using the formula: Gross Profit = $2,000 − $700 = $1,300

So, your gross profit is $1,300 for the month.

This shows how much you made from sales after covering the direct costs of creating and delivering the prints.

Try with SASA

Gross profit example

Track your gross and net profit with SASA

Accounting software for self employed people

SASA helps you keep track of your business's income, and expenses so you can know your gross and net profit. Just connect your bank accounts ad SASA will do the rest for you.

Learn more

Connect your bank accounts to figure out your gross vs net pay with SASA

Is Gross Profit Before Taxes?

Yes! Gross profit is what you make before taxes. It's the total amount you are paid before Taxes, Insurance, Loans Repayments, Dividends and other costs and more are removed from your.

Try with SASA

Gross profit definition: Advanced

Gross profit is a measure of profitability that shows the revenue a business retains after covering the direct costs associated with producing or delivering goods and services. It's calculated as the difference between total sales (or revenue) and cost of goods sold (COGS). This metric is critical for self-employed individuals and businesses alike, as it helps gauge the efficiency and profitability of core operations without accounting for other business expenses.

Key Components

Total Sales (Revenue): This includes all income generated from selling goods or services.
Cost of Goods Sold (COGS): COGS refers to all direct expenses required to produce goods or services. For a self-employed person, this might include materials, direct labor, packaging, and shipping costs. COGS excludes indirect expenses like rent, utilities, and administrative costs, as these are not directly tied to production.

Try with SASA

The purpose and importance of Gross Profit

Gross profit provides insight into:

Profitability: It helps measure how efficiently a business turns direct costs into revenue. Higher gross profit means the business is keeping more of its earnings after covering production costs.
Pricing Strategy: By calculating gross profit, a business can assess if its prices are high enough to cover the Cost of Goods Sold (COGS) and contribute to overall profitability. Adjusting prices may be necessary to ensure a sustainable gross margin.
Cost Control: Monitoring gross profit helps identify when COGS are too high, prompting efforts to reduce costs through better sourcing, production methods, or efficiency improvements.
Financial Health: Gross profit is an essential component of a business's income statement. It's used to calculate gross profit margin, a key indicator of the business’s overall financial performance and stability.