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The profits made by a business consist of the money that is left over once all of the expenses incurred in running the business have been paid. Businesses usually separate their costs into variable costs and fixed costs. This means that a business can calculate two different types of profit - gross profit and net profit.

Gross profit

Gross profit is the difference between the money received from selling goods and services and the cost of making or providing them. It ignores any fixed costs, or overheads, so it is useful in showing how much profit each product or service generates.

The money received from selling goods and services is sales revenue. The cost of making the goods or providing the services is called the cost of sales, since it reflects the variable costs directly related to production, such as raw materials.

Calculating gross profit

In order to calculate gross profit, a business will use the following formula:

Gross profit = sales revenue − cost of sales

For example, a business produces bottled water. It sells 10,000 bottles per day, at a price of £0.99 each, and knows that the variable costs of making each bottle are:

The gross profit on each bottle of water is:

£0.99 − £0.49 = £0.50

The total gross profit is:

£0.50 × 10,000 bottles = £5,000 per day