Definition:

Gross profit is the difference between a company’s revenue from selling products and the variable costs that went into creating that product. Those variable costs can also be called Direct Costs, or Costs Of Goods Sold (COGS)

Gross profit = Revenue – COGS

Example:

The company sells $1,000 of products. The cost of the materials needed to make them was $400, and labour to assemble them came to $200. So total COGS is $600, leaving a Gross Profit of $400.

Why it matters:

Gross profit tells us how much profit we generate by making and selling our products or services, only considering the costs that would increase if we sold 1 extra product.

You can think of this as focusing only on the profitability of producing the products and services, as it excludes all the other management costs and overheads from running the overall business.