Gross profit is a financial metric that measures a company’s profitability from its core business activities, particularly the production or sale of goods or services. It is a key indicator of the efficiency of a company’s production and pricing strategies. Gross profit is calculated by subtracting the cost of goods sold (COGS) from the total revenue generated from the sale of goods or services.

The formula for calculating gross profit is as follows:

Gross Profit = Total Revenue – Cost of Goods Sold (COGS)

Here’s a breakdown of the key components:

1. Total Revenue: This represents the total income generated by the company from the sale of goods or services. It includes the revenue from sales, discounts, and returns.
2. Cost of Goods Sold (COGS): COGS represents the direct costs associated with the production or acquisition of the goods or services that a company sells. These costs include:
   • The cost of raw materials and components used in production.
   • Direct labor costs related to the production process.
   • Manufacturing or production overhead costs, which may include rent for the production facility and utilities.

Gross profit is a crucial metric for assessing a company’s cost control and pricing strategies. It provides insights into how efficiently a company is managing its production costs and how profitable its core business activities are. High gross profit margins are typically considered favorable, as they indicate that a company is effectively controlling production costs and generating profit from its primary operations.

In SME Hishab Software Gross profit is calculated automatically. You will find this in both CFO Dashboard and income statement.