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What is gross profit

Also known as: what is gross profit, how to calculate gross profit, gross profit formula

Definition

Gross profit is revenue minus the cost of goods sold (COGS): what is left from sales after goods, materials and direct labour. Rent and salaries come from it.

Why it matters

Gross profit answers the first question on any P&L: does your price cover what it costs to make or buy what you sell.

Common mistakes

Treating gross profit as the owner's income, when rent, marketing, salaries and the tax on profit still come out of it.

Related terms

Worked exampleIllustration

An online shop's month, down to gross profit

The month on paper

  • Sales₪50,000
  • Goods sold-₪22,000
  • Shipping from the supplier-₪3,000
  • Gross profit₪25,000
  • Selling expenses (shipping to customers, card fees)-₪4,000
  • Overhead (rent, software, bookkeeping)-₪15,000
  • Operating profit₪6,000

Steps

  1. Cost of sales is the goods plus shipping from the supplier: 22,000 + 3,000.₪25,000

  2. Gross profit is sales minus the cost of sales: 50,000 - 25,000.₪25,000

  3. As a share of sales, that is the gross margin: 25,000 ÷ 50,000.50%

  4. Shipping to customers and card fees are selling expenses, so they come off below gross profit, together with the overhead: 25,000 - 4,000 - 15,000.₪6,000

  5. A price 1% higher, on the same sales, adds ₪500 straight to operating profit, 8.3% more than the ₪6,000. Cutting the cost of sales by 1% adds ₪250 (4.2%), and cutting selling expenses and overhead by 1% adds ₪190 (3.2%).+₪500

The ₪25,000 looked like profit, and ₪6,000 of it was.

Illustration

Gross profit, the first step down

  1. Sales₪50,000
  2. Cost of sales: goods and shipping from the supplier-₪25,000
  3. Gross profit₪25,000
  4. Selling expenses-₪4,000
  5. Overhead-₪15,000
  6. Operating profit on the P&L₪6,000

Gross profit is ₪25,000, a gross margin of 50%. After selling expenses and overhead, ₪6,000 is left as operating profit. Gross profit is the first step, not the last.

What 1% does to operating profit

  1. Price up 1%+₪500

    8.3% more operating profit

  2. Cost of sales down 1%+₪250

    4.2% more operating profit

  3. Selling expenses and overhead down 1%+₪190

    3.2% more operating profit

A price 1% higher, on the same sales, adds ₪500 to operating profit, 8.3% more than today's ₪6,000. The same 1% off the cost of sales adds ₪250, off the overhead ₪190. A price rise costs nothing to deliver, so all of it reaches the bottom line. That is operating leverage, and why the price is the first lever to test.

Your own month

Type your numbers, excluding VAT. The staircase and the levers follow them.

The online shop's month: sales minus the cost of what was sold is gross profit. Selling expenses and overhead come off below it.

Definition

Gross profit is the first subtotal on a profit and loss statement: revenue minus the cost of sales. The cost of sales holds only what it took to make or buy what was sold: the goods, the raw materials, the direct labour of whoever makes the product or delivers the service, and shipping from the supplier. Shipping to customers, card fees, rent, marketing and admin salaries sit below this line as operating expenses. The usual order of lines on an Israeli P&L is revenue, cost of sales, gross profit, selling and marketing expenses, general and administrative expenses, operating profit, finance expenses, profit before tax and net profit. Gross profit is an amount in shekels. Gross margin is the same figure as a share of revenue: gross profit ÷ revenue × 100. A pure service business with no stock often shows no separate cost of sales line, and then its direct costs are the hours of whoever delivers the work, subcontractors and materials bought for the job. Gross profit is counted when you sell, not when the customer pays, so it is not cash.

Why it matters

If gross profit is thin, more sales will not save the business, because each extra sale brings too little to pay the rent and salaries. Many owners read gross profit as their own income and forget that marketing, rent, salaries and, in the end, the tax on profit still come out of it. Watch it in shekels and as a margin together: a business can raise its gross profit in shekels while its gross margin falls, when the growth comes from low margin items.

Directly related: Gross margin, COGS, Net Profit.

Formula

Gross Profit = Revenue - COGS

Improvement tips

  • Read gross profit next to gross margin every month, by product or service line, so growth in cheap items cannot hide a falling margin.
  • Keep shipping from the supplier inside the cost of goods, and shipping to customers and card fees below the line, the same way every month.
  • Raise gross profit through price, supplier cost or product mix. Cutting rent helps the bottom line, but it never shows up here.

Common mistakes

  • Getting shipping wrong. Shipping from the supplier belongs in the cost of the goods. Shipping to customers and card fees are selling expenses. Decide once and keep it the same every month.
  • Assuming that more sales will make up for a low or negative gross profit on each unit.
  • Reading gross profit as cash. It is counted when you sell, not when the customer pays.
Gross Profit vs Net Profit

Related terms

FinanceBeginner

Gross margin

Gross margin is the share of revenue left after the cost of goods sold: (revenue - COGS) ÷ revenue × 100. At 60%, 60 agorot of each shekel remain.

FinanceBeginner

COGS

COGS (cost of goods sold) is the cost of the goods or services sold in a period: goods, materials and direct labour. Revenue minus COGS is gross profit.

FinanceBeginner

Net Profit

Net profit is what a business keeps from revenue after every expense, cost of sales, running costs, interest and tax. It is the bottom line, not cash.

FinanceBeginner

P&L

A P&L (profit and loss statement, or PnL) sums up a business's revenue and expenses for a period and shows if it made or lost money. Profit on it is not cash.

FinanceBeginner

Overhead

Overhead is the indirect cost of running a business, like rent, bookkeeping, insurance and admin salaries, that cannot be traced to one product or customer.

FinanceBeginner

Revenue

Revenue is everything a business sold in a period, before any costs and without the VAT on the invoice. It is the P&L's top line, not profit and not cash.

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Quick check

An online shop sells ₪50,000 in a month. The goods cost ₪22,000 and shipping from the supplier ₪3,000. What is its gross profit?

Choose an answer

Frequently asked questions

Do I need to understand gross profit before I start a business?
Yes. Gross profit tells you whether your price covers what it costs to make or buy what you sell. If a product barely covers its own cost, no amount of sales will pay the rent, so check it before you launch.
When does gross profit first matter for a new business?
As soon as you set a price and know your direct costs. The gap between them, times what you expect to sell, is the money you will have for rent, marketing and salaries.
How do I estimate gross profit before launch?
Take the sales you expect in a month and subtract the goods, materials, direct labour and shipping from the supplier that those sales need. What is left is the month's gross profit. Divide it by the sales to get your gross margin.
What is the difference between markup and gross margin?
Markup is measured on the cost, gross margin on the price. Buy an item at ₪50 and sell it at ₪100, and the markup is 100% while the gross margin is 50%. Owners who price from markup usually believe their margin is higher than it is.
Why does gross profit matter for a business that is already running?
It is the money that pays for everything else. Rent, marketing, admin salaries and finance costs all come out of gross profit, so when it shrinks, everything below it on the P&L shrinks too.
Sales went up, but the business earns less. How can that happen?
Gross profit in shekels can rise while the gross margin falls, when the growth comes from low margin items or from discounts. Look at both numbers by product line, not only at total sales.
How do I calculate gross profit without stopping daily work?
Once a month, take the month's sales excluding VAT and subtract the cost of what you sold that month. Most bookkeeping software shows it as a line on the monthly profit and loss report.
How can a business raise its gross profit when sales dip?
Raise prices where customers accept it, negotiate supplier costs, drop items that barely cover their cost and push the ones with the best margin. Cutting rent or admin costs helps the bottom line, but it does not change gross profit.
What does gross profit mean in plain words?
It is what is left from sales after paying for what you sold. If you sell a shirt for ₪100 and it cost you ₪40 to buy and bring to your shop, the gross profit on it is ₪60.
Is gross profit the money I can take home?
No. Gross profit still has to pay rent, marketing, salaries and interest, and after that comes the tax on profit. What an owner can take out sits near the bottom of the P&L, and only if the cash is actually in the bank.
Does a service business have gross profit?
Yes. Its cost of sales is the hours of whoever delivers the work, subcontractors and materials bought for the job. A pure service business with no stock often shows no separate cost of sales line, so work it out yourself for each job or each month.
What is the difference between gross profit and gross margin?
Gross profit is an amount in shekels: revenue minus the cost of sales. Gross margin is the same thing as a percentage of revenue. A shop with ₪50,000 in sales and ₪25,000 in gross profit has a gross margin of 50%.

Sources: IFRS Foundation, IAS 1 Presentation of Financial Statements, checked September 2026, IFRS Foundation, IAS 2 Inventories, checked September 2026

Last reviewed: 2026-09-23

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