Gross Profit - Formula, Ratio, Meaning, Net Profit, Margin, & How to Calculate

Published on December 19, 2025 | 2 min read

If you run a business, be it a general store, an online store, a manufacturing unit, a software company or any other service company, understanding gross profit is important. It is one of the most basic parameters to be put in your business balance sheet, a number that answers the fundamental question. Is the business profitable by running its core operations? Many new entrepreneurs focus only on sales and revenue, but they do not show whether their business is truly making money. This is where gross profit becomes important.

What Exactly is Gross Profit?

In simple words, gross profit is the money your business earns by core business activity. Is it generating more money than money spends on manufacturing products?

Gross profit is derived after subtracting the direct cost of producing or purchasing the goods you sell. These direct costs are known as Cost of Goods Sold (COGS).

The formula is simple: Gross Profit = Revenue – Cost of Goods Sold (COGS)

Revenue is the total money you earn from selling products. COGS includes expenses such as raw materials, wholesale purchase costs and wages for workers directly involved in manufacturing.

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Why is Gross Profit Important in the Indian Context?

With increasing competition, many sectors like retail, textiles, FMCG, electronics, and food products sell products at a price marginally over their cost price. Gross profit helps you understand whether your pricing and sourcing strategies are effective. Here are some reasons why gross profit matters:

Helps maintain healthy margins

In India, where customers are highly price sensitive, businesses often reduce prices to attract buyers. Gross profit helps you check if you are still earning enough after price reductions.

Guides pricing decisions

Whether you are fixing an MRP or deciding retail margins, gross profit helps you understand if your selling price is adequate.

Shows cost efficiency

For Indian manufacturers, prices of raw materials like steel, cotton, or chemicals can change often. Gross profit helps you track how such changes affect profitability.

Useful while applying for loans

Banks and NBFCs usually examine profitability before approving business loans. A good gross profit makes your financial profile stronger.

Supports planning and budgeting

A healthy gross profit makes it easier to manage rent, electricity bills, staff salaries, GST compliance, marketing, and logistics.

Gross Profit vs Net Profit

Many Indian business owners confuse these two terms, but they are different.

Gross profit considers only the direct cost of producing or purchasing goods.
Net profit is what remains after subtracting all expenses such as rent, salaries, utilities, interest on loans, GST payments, and taxes.

Gross profit is the starting point in measuring performance, while net profit is the final result.

A simple example

Imagine you run a small clothing shop in Mumbai.

You earn ₹2,00,000 from sales in one month.
Your direct costs for purchasing shirts, trousers, and dresses total ₹1,20,000.

Your gross profit is: ₹2,00,000 – ₹1,20,000 = ₹80,000 This ₹80,000 is what remains to cover rent, staff salaries, electricity, packaging, and other expenses.

Gross profit may sound like a technical accounting term, but it is something every stakeholder in business should understand. It helps you price your products correctly, manage costs effectively, and build a more profitable and sustainable business.

About Author

Pradnya Surana

Sub-Editor

is an engineering and management graduate with 12 years of experience in India’s leading banks. With a natural flair for writing and a passion for all things finance, she reinvented herself as a financial writer. Her work reflects her ability to view the industry from both sides of the table, the financial service provider and the consumer. Experience in fast paced consumer facing roles adds depth, clarity and relevance to her writing.

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