Answers the Question
How much money did we earn (or lose)?
Calculator for Gross Profit
What Is the Gross Profit?
The gross profit of a firm is the measure of how much money was earned over a given period of time.
Why Is it Important?
- Being able to express profits in a dollar amount will allow firms to understand how much additional capital they have to invest in other money-making ventures.
- Without calculating gross profit, a business wouldn't even be able to know if it was earning a profit or not.
Formula(s) to Calculate Gross Profit
- GROSS PROFIT = REVENUE - COST OF GOODS SOLD
- Thinking of gross profit in terms of absolutes. While it's important to know if one is making a profit, it's vital to understand the amount of investment that was required. Earning $1,000 on a $10 investment is very impressive. Earning $1,000 on a multi-billion dollar investment is not impressive at all.
- Not considering risk. Unless profits are weighed against risk, firms will tend to take greater and greater risks until they go bust.