This glossary uses Visual Finance™ to bring financial terms to life. Each example shows data from the Round Number Company, a fictional business with simplified figures to make learning easier. For more details, visit 'How to Read Visual Finance'.
Gross Profit calculation: Sales less Direct Cost
Gross Margin ratio: Gross Profit as a percentage of Sales
Example: The Round Number CompanySales = 200; Cost of Sales = 80 Gross Profit = 200 - 80 = 1200 Gross Margin = 120/200 = 60% |
Gross Profit represents the amount of profit remaining after subtracting the Direct Cost of labor and materials from Sales. Some companies may also include relevant overhead costs associated with the production of goods and services in their Direct Costs.
Gross Margin, indicates the portion of Sales that remains after covering the Direct Costs.
Some people use the terms Gross Profit and Gross Margin interchangeably. The same thing can happen with Gross Margin and Margin (which can have other meanings). Make sure you understand which term is being used!
Gross Profit is also known as Gross Income.
See also the discussion at Contribution.
The above is our generic explanations of common corporate financial terminology. Actual meanings can vary widely from company to company; in order to have the correct internal definition you need to ask your Finance Department, "What do you mean by that?"
term list.