Gross profit is the income minus the cost of goods sold or services provided. For example, if you sold goods for $100,000 and their cost was $70,000, your gross profit would be $30,000. Gross profit should not be confused with net profit, as taxes are not taken into account when calculating it.
Gross profit is the basis for calculating operating and net profit. To obtain operating profit, operating expenses such as employee salaries, office rent, etc. are subtracted from the gross profit. Then, taxes, loans, and fines are subtracted from the operating profit to determine net profit.
The gross income indicator can be used not only in trade. For example, the indicator will be useful in calculating the effectiveness of an advertising campaign. An entrepreneur can calculate how much was spent on marketing activities and what income was received from advertising. After that, decide whether the advertising was effective in terms of earnings.
Calculating gross income will allow you to assess the profitability of your products and the effectiveness of your business. Based on the information obtained, you will be able to make management decisions. For example, look for ways to reduce the cost of goods or adjust the company's pricing policy. Gross profit does not need to be calculated constantly. It is enough to track the dynamics of this indicator monthly and calculate it when making decisions.