Gross profit

Gross profit is a financial measure that indicates the difference between the revenue from the sale of goods and services and the cost of producing those goods or services (also known as the cost of goods sold). It is an important key figure that helps businesses understand how efficiently they generate income from their core activities, before other operating costs, taxes and interest are taken into account.

Why does gross profit matter?

• Profitability analysis. Gross profit gives insight into the business's underlying profitability and its ability to cover operating costs and generate a profit.
• Pricing strategy. Analysing the gross profit margin can help businesses set prices for their products and services so as to make sure they are competitive, while maintaining the desired level of profitability.
• Cost control. By monitoring gross profit, businesses can identify opportunities to reduce costs in the production process or the supply chain.

How is gross profit calculated?

Gross profit = Sales revenue – Cost of goods sold

Here sales revenue refers to the total income generated from the sale of products or services, while cost of goods sold covers all the direct costs connected with producing or purchasing the products that are sold.

An example of using gross profit

Let us say that a business sells goods for NOK 1 million, and the cost of producing those goods is NOK 600 000. The gross profit will then be:

1 000 000 – 600 000 = 400 000

That means the business has NOK 400 000 available to cover other operating costs, such as rent, wages, marketing expenses, and so on.

Tips for improving gross profit

1. Raise selling prices. Where possible, consider raising selling prices without significantly reducing sales volume.
2. Reduce the cost of goods. Look for ways of reducing production costs, whether by negotiating better prices with suppliers, making production processes more efficient, or switching to more cost-effective materials.
3. Optimise the product mix. Focus on products with higher gross profit margins in order to improve overall profitability.

Read more about how the key figures in Capassa keep gross profit up to date automatically.