Financial Glossary
Gross Profit
Gross profit is revenue minus the cost of goods sold (COGS) -- the direct costs attributable to producing the goods sold or delivering the services rendered. For product businesses, COGS includes raw materials, direct labor, and manufacturing overhead. For service businesses, COGS (sometimes called cost of revenue) includes labor directly tied to service delivery and direct material costs. The gross profit margin -- gross profit divided by revenue, expressed as a percentage -- reveals how efficiently the core product or service is priced and produced, before overhead, sales and marketing, and administrative costs are considered. Higher gross margins give businesses more operating leverage to absorb fixed costs as they scale.
Problem & Application
A bookkeeping firm serving STR operators bills $500,000 in annual revenue. Direct costs -- staff hours actually spent on client work, payroll software subscriptions, and cloud accounting licenses allocated to clients -- total $200,000. Gross profit = $300,000; gross margin = 60%. A typical professional services firm targets 50-70% gross margins, so this is within range. If the firm adds offshore bookkeeping staff at lower cost, reducing direct labor by $50,000, gross profit rises to $350,000 and margin improves to 70% -- the same revenue now funds more capacity for sales, technology, and management. Tracking gross margin by client segment (STR vs. campground vs. crypto) helps identify where pricing is too thin relative to service complexity.
In Short
Gross profit provides valuable insights into a company's ability to generate revenue from its core operations, and it should be optimized to improve financial performance.