Why gross profit matters is simple: it helps us understand whether our sales are leaving enough money to cover running costs, pay ourselves, support cash flow and build a stronger business. Gross profit is more than a number in the accounts. It affects pricing, break-even, outsourcing, cost control, margins and the decisions we make every day.

About this episode

Why Gross Profit is a big deal for your Business is episode 53 of the I Hate Numbers podcast. This episode focuses on gross profit as a practical business number, not just an accounting term.

We explain what gross profit is, how it connects with cost of sales, why gross margin matters, how it helps with pricing and break-even decisions, and how we can measure and manage it using better systems.

If you want the wider profit foundation first, our episode on What Is Profit? Gross Profit and Net Profit Explained is a useful starting point.

Why gross profit matters

Gross profit matters because it acts as a financial barometer for the health of your business. Every sale should leave enough money to help cover the running costs that follow.

Those running costs may include rent, wages, advertising, website costs, admin, software and the money you need to pay yourself. If gross profit is too low, the business has less room to cover those costs and still produce net profit.

When gross profit drops, your break-even position gets harder. You need to sell more just to stand still, and your safety cushion becomes weaker.

Key points from this episode

What is gross profit?

Gross profit is the difference between what you sell something for and the direct cost of producing, buying or delivering it.

For a product business, that may mean the selling price minus the cost of buying, cleaning, making or preparing the product. For a hospitality business, it may be the difference between the cost of food and drink and the selling price to customers.

For a service business, gross profit may come from the difference between what you charge clients and the direct costs needed to deliver the service, such as venue hire, materials or direct labour.

Cost of sales and gross margin

Cost of sales refers to the costs directly linked to the sale. These are the costs involved in buying, making or delivering what you sell.

Gross margin is closely connected with gross profit. It usually expresses gross profit as a percentage of the selling price. The cash profit may be the same, but margin helps us compare performance more easily across products, services or time periods.

That is why gross profit and gross margin are useful for tracking business performance. They help us see whether the business is making enough money from what it sells.

Gross profit and break-even

Gross profit links directly to break-even. Break-even tells us how much we need to sell before the business covers its costs.

If gross profit is strong, each sale contributes more towards fixed costs and profit. If gross profit falls, each sale contributes less, which means we may need more sales just to cover the same costs.

The existing notes link this topic to break-even in your business, which is a useful supporting concept when reviewing pricing and margins.

Gross profit and pricing decisions

Pricing and gross profit go hand in hand. When we understand the direct cost of delivering a product or service, we can make better decisions about what to charge.

Markup and margin are two ways of looking at the relationship between cost, selling price and profit. Markup starts with the cost and adds an amount to reach the selling price. Margin looks at the gross profit in relation to the selling price.

Both can be useful, but they are not the same thing. Understanding the difference helps us avoid underpricing and protect profit.

Gross profit and business decisions

Gross profit supports many business decisions. It can help us decide whether to outsource work, continue selling a product, adjust pricing, reduce waste, improve buying, or stop offering services that consume too much time and cost.

It can also help us compare opportunities. Some products or services may produce sales, but not enough gross profit. Others may create stronger margins and better cash flow.

That is why gross profit should not sit hidden in year-end accounts. We need to use it as a live decision-making tool.

Gross profit and cash flow

Stronger gross profit can support stronger cash flow. When each sale leaves more money after direct costs, the business has more room to pay overheads, reinvest and build resilience.

Gross profit is not the same as cash, but poor gross profit can put pressure on cash. If prices are too low or direct costs are too high, money can leave the business faster than expected.

For a wider comparison, our episode on How different is cash to profits? explains why profit and money in the bank are connected but different.

Measuring and managing gross profit

Measuring gross profit is only part of the job. Managing it is where the real value appears.

To manage gross profit, we need good records and a fit-for-purpose accounting system. Cloud accounting can help us capture sales, direct costs and business activity more efficiently, giving us better information throughout the year.

If we rely only on spreadsheets or accounts produced once a year, we make decision-making harder. Our episode on Cloud Accounting: Embracing the Future of Financial Management explains how digital systems can support better financial control.

How to improve gross profit

We can improve gross profit in several ways. We may increase selling prices, reduce direct costs, improve buying, cut waste, use materials better, improve production processes or review how services are delivered.

In a hospitality business, that may mean better food preparation, less waste and stronger purchasing. In manufacturing, it may mean better use of labour, materials and overheads. In a service business, it may mean pricing work properly and reducing unrecovered time.

The key is to know your numbers first. Once we understand the margin, we can test what happens if prices, costs or volumes change.

Using profit calculators

The original episode points to free online calculators that help business owners test profit, pricing and discounting decisions.

The free profit and discount calculator can help you see what gross profit you are making now and what could happen if selling prices or costs change.

The pricing and discounting calculator is another useful tool for testing numbers before making decisions. Before publishing, confirm both calculator links are still current and working.

Gross profit checklist

• Do you know your gross profit for each product or service?
• Have you separated direct costs from running costs?
• Do you understand your cost of sales?
• Are your selling prices high enough to cover costs and profit?
• Do you know the difference between markup and margin?
• Have you checked how gross profit affects break-even?
• Are any products or services producing weak margins?
• Can you reduce waste, improve buying or increase efficiency?
• Do your accounting systems show gross profit clearly?
• Are you using gross profit to make better business decisions?

FAQs about why gross profit matters

What is gross profit?

Gross profit is sales income minus the direct costs of producing, buying or delivering what you sell. It shows how much money is left before running costs are deducted.

Why does gross profit matter in business?

Gross profit matters because it helps cover running costs, supports pricing decisions, affects break-even, influences cash flow and shows whether products or services are financially worthwhile.

Is gross profit the same as net profit?

No. Gross profit looks at sales less direct costs. Net profit is what remains after other running costs and overheads are also taken into account.

How can I improve gross profit?

You can improve gross profit by increasing prices, reducing direct costs, improving buying, cutting waste, improving processes and reviewing products or services with weak margins.

Episode Timecodes

• 00:00 – Introduction to episode 53
• 00:29 – Why profit must be a business objective
• 00:53 – Focusing on gross profit
• 01:41 – What the episode covers
• 02:29 – Starting with a gross profit example
• 02:50 – Jovan’s trainer business example
• 03:32 – Gross profit across different business sectors
• 04:23 – Gross margin and cost of sales
• 05:07 – Why gross profit is a financial barometer
• 05:51 – Gross profit, break-even and margin of safety
• 06:16 – Gross profit as a KPI
• 07:11 – Pricing, outsourcing and decision-making
• 08:12 – Markup and margin
• 09:24 – Gross profit and healthier cash flow
• 09:52 – Measuring and managing gross profit
• 10:12 – Why cloud and digital systems matter
• 10:56 – Managing margin through prices and costs
• 11:44 – Improving gross profit in hospitality and manufacturing
• 12:03 – What makes a good gross margin?
• 13:11 – Summary of why gross profit matters
• 13:41 – Free calculators and what-if scenarios
• 14:21 – Final support and wrap-up

Related episodes

• What Is Profit? Gross Profit and Net Profit Explained
• Seven Tips to Increase Your Profits: Costs, Customers and Cash Flow
• Understanding Your Financial Statements: Cash Flow, Profit and Balance Sheet

Key takeaway

Gross profit is a big deal because it shows whether your sales are leaving enough money to cover running costs, support cash flow and create net profit.

Use gross profit to guide pricing, break-even, outsourcing, cost control and product or service decisions. Measure it regularly, manage it actively and use your numbers before problems appear.

Plan it, Do it, Profit.

“Gross profit is the bucket of money that helps you cover your costs and build a healthier business.”

Further Support

The I Hate Numbers podcast helps business owners understand accounting, tax, finance, profit, cash flow, and business planning in a practical way. We simplify financial topics so you can make better decisions and feel more confident with your numbers.

You can also watch more practical finance and tax support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Making a profit in your business is vital. It's absolutely essential that in your business planning, in your end goals, that you set profit as one of your primary objectives. That might sound like the statement of the obvious, bit like it's saying the sun rises and the sunsets, but it's absolutely key that you dial in making a profit. Now, not just making a profit.

In this particular broadcast, I'm going to be focusing on a particular profit called gross profit. Now, gross doesn't mean unpleasant or disgusting, even though having a rubbish GP is not good for your business. Hi folks. My name is Mahmood. I'm the host of the weekly podcast I Hate Numbers. I'm an accountant by qualification, and also I run my own accounting business and I run a training company.

Those two companies operate in the world of numbers, operate in the world of finance. I'm absolutely proud and chuffed to be an accountant, and even though your eyes might be rolling over, saying, oh my God, there's another accountant on the airways, my mission here is to improve your money mindset. Make sure that you make money in your business, and by money I mean profit that you have a good lifestyle,

you save time, you save tax, and have the business that you deserve to have. Now, in this episode of I Hate Numbers part of my mission to achieve that money mindset and improving your business, I'm going to be focusing on gross profit. Well, particularly what it actually is, why it's such a big deal, what we can do once we understand what our gross profit is, the power from pricing, decision making, lots of things.

We talked about breakeven in a previous episode, and how we measure and manage your gross profit. And obviously I'm going to be sharing some tips as we go along, and I've got a nice little freebie for you, which I'll talk about at the end of the episode. Obviously, dive into the show notes and it's all there for you to see.

I'd love it if you could subscribe to this episode and the podcast. Tell your friends, tell your family. The more subscribers we can have, then the more we can spread the message out. Okay, let's crack on with the podcast. Now, first of all, let's have a look at what gross profit actually is, and always the best way to look at these things is to think about an example.

Now, let's assume we've got a business selling secondhand trainers online, and they decide to sell those trainers at a hundred pound per pop. Now, if our business owner, let's call them Jovan, sells 20 of those pairs, he'll make two grand worth of sales. Congratulations, Jovan. That's pretty good going.

Unfortunately, that will not be Jovan's profit. What he needs to do, he needs to go out and buy, clean those trainers. Well, I hope he does anyway before he sells them on. Let's say for an argument's sake, that it costs Jovan 40 pounds a pair to buy in and clean those trainers. That means now, Jovan is making 60 pounds for each pair of trainers he sells.

That sets a good healthy profit at 1200 pounds. The 40 pounds is his cost, 60 pounds is his profit he's making on his trainers. Now, let's dip into other business sectors. So, if your business is in the hospitality business, selling food and drink, the difference between what you make a meal for what you buy in your drinks for and sell onto your customers is your gross profit.

If you are in the service sector selling courses, the difference between what you charge your clients, and the venue hire, materials will be your gross profit. If you're a manufacturer, making things,then the product selling price minus the cost to you of making those items, the cost of materials, the cost of labor, for example, the cost of the manufacturing overhead will be your gross profit.

Now, by the way, ask people in the world of finance and numbers, love to have alternative terminology. So, if you hear the phrase gross margin, it's pretty much the same thing. And that's another piece of terminology to share with you on this jargon-free show is that the cost of buying in those things like trainers, food, room hire, materials, all those costs that are linked with these sales easily is called cost of sales.

Now, if you're thinking, by the way, oh, this is going to be a lot of number crunching here, and I'll give you a bit of a spoiler alert here. We've got a free online calculator for you to plug into that'll do the calculations for you, and there's more that we'll get from the calculator. More of that later on in the episode.

Now, having seen what gross profit actually is, why is it such a big deal? Well, there are many reasons why gross profit is a big deal for your business. Now, firstly, it's one of the most important financial barometers to check the health of your business. Every time you sell something, your bucket of money builds up.

Now, this bucket, you've then got to pay for your running costs in your business, which includes, by the way, paying yourself. Typically, these items such as rent, the wages you pay to yourself, or your advertising costs, or your website-based costs are called fixed expenses. Now, once you've covered your fixed costs, then you're left with a net profit.

Now, why it's such a big deal, why it's an important barometer? If, for example, your gross profit drops, and that could be because the cost of making things, the cost of buying materials goes up, you make less gross profit and your break even points will drop accordingly. And when I say drops, that means you've got to sell more in order to stand still.

Your margin of safety, which is a safety cushion, gets worse, and therefore, that's not very good. And by the way, folks, if you want to check out previous podcast episode, we've covered break even, and there’s a beautiful free online break even calculator for you to use. Now, secondly, gross profit is an assessment tool, so it sees how efficient your business is in using your staff team to make that product, deliver the service, materials, manufacturing costs,

and it's a metric, it's a real key metric, or what we might call a KPI. Now, this KPI is also linked to the other type of cost that you may have, and these are ones that go up and down to your business activities. Again, check out previous podcast episodes where we've looked at cost behavior. Now, we haven't finished yet in terms of why gross profit is such a big deal.

Well, we also use it very widely in making decisions in business. So, when you come to make decisions in your business, like how much should I charge a customer? How much should I price my products at? How much should I charge my services? Well, pricing and gross profit go hand in hand. Pricing strategies about when it comes to outsourcing,

so if you decide there's something you are doing, whether it's making a product or you think about outsourcing, using your gross margin to make the evaluation is a very powerful tool. Sometimes products don't make the money that you want them to. Services that you offer consume lots of energy and time, and cost you money,

so dropping products, looking at business opportunities, even sacking clients are just a few examples of applying gross profit in your decision making. Now, I mentioned pricing earlier on, so let's have a recap before we dive into pricing. So, we've talked about what gross profit actually is. We've dipped our toe into the water as to why gross profit is such a big deal.

We've talked about the many decisions that we can make. We've talked about that financial barometer. Now, let's have a look at gross profit or profit margin in the application of the world of pricing. Now, most of us want to sell more products. Who doesn't? Make more profit - why not? And knowing what your costs are, your markup and margins,

is one way to approach that. Now, for those of you listening, thinking, what on Earth is Mahmood talking about markup and what's this margin? Let me summarise what those two approaches are. Now, in some sectors retailing in particular, somebody will take the cost of what it's to them of buying in the product or making the product, and add something to that cost to give them their selling price.

That's called a markup. Some people, again, in the hospitality sector, manufacturing, will look at their gross profit. And look at it, what it is in relation to the price they sell it at, and that's called the margin. It's the same cash profit, but it's just expressed in slightly different ways. So, pricing is still fundamentally based on adding something to the cost of the product or going by what the market says, coming up with what you consider to be a good margin for your product.

Now, we'll be revisiting pricing while particularly in next week's podcast, so subscribe. Make sure you don't miss the episode, and we'll come back to that in more detail. Now, there's even more about the power of gross profit. A good gross profit gives you much healthier cash flows. It gives you a direct relationship with the prices you're selling, and the healthier your gross profit, then the healthier your cash flows are, and that means the healthier your business will be.

Now, lastly, I want to look at the actual continual measuring your gross profit and actually managing it. Now, fundamental to any form of numbers that we deal with is actually having a good fit-for-purpose accounting system. Now for me, cloud and digital is a must have, not it will be nice to have one day.

So, that's where all your heavy lifting, all your data capture, recording what you are spending is done digitally, which cuts down the time that you spend on recording transactions, and with a bit of technology, a bit of human blending, then you will be able to capture that information and have an online system that tells you what's actually going on

under the bonnet. As I said on previous podcasts, if you rely on a bunch of spreadsheets which have their purpose and your accounts that are produced once a year to run your business, then you've got a tough challenge on your hands. Again, check the show notes out. I've got a link there to a free guide on cloud accounting called Release the Power in You. Recommend,

it's a read. Now, measuring is half the battle. Managing is the other half. So, if we go back to our earlier example, Jovan, he's selling his training shoes. Now, he wants to make more profit from selling those training shoes. He's got options. He can either charge more for the training shoes he's selling, always an option.

Obviously what we've got to consider is pushback from the clients and the customers who could spend less money. Look to drive down how much he spends on cleaning the trainers, how much he spends on buying those second-hand trainers in, and it's easier, not easy, for Jovan to control and manage those costs. In a hospitality business, if you look at maintaining a healthy gross margin, which is absolutely critical, then you can look at being efficient in the food preparation,

look for better procurement, less wastage. If you go into the world of manufacturing, when you look at the gross profit that you make on manufacturing, then again, you've got options. You can look to make efficiencies in the production process. You can look for better usage of materials, better utilisation of overheads.

All those options are available to you. Now, one question I have commonly get asked by people is, what is a good gross margin for our business? And in typical number style, it really depends on the sector that you inhabit. So, if you take something like the hospitality sector, if you have a blanket gross margin, typically you'd be looking at about an average 60 to 70%.

Now, if you drill down even deeper and your accounting systems enable you to do that, then on things like wines and spirits, your margin will be about 70 to 80%. If you go down to a draft beer for example, that can drop to lowest 50-55. In the world of manufacturing, manufactured products, I've dealt with clients who've got margins as low as 20%, which actually for their sector, for what they're doing is a good number.

So, really the key answer is, it depends on the sector you're in, and it depends on what you're benchmarking against. Ultimately, you want your gross profit to be one that allows you to cover your costs and give you a competitive and healthy business return. Okay guys, let's conclude where we are. Let's summarise.

So, we've looked at what gross profit is. We've talked about why it's such a big deal and it is a big deal. That gross profit is your bucket of money for which you cover all your costs. If you can't do that, then you won't have a business for much longer. We've talked about the applications of gross profit, these different areas, the different arenas from break even to pricing, to making decisions, which cover a whole variety of activities and events that will occur in your business.

We talked about how to measure and manage that gross profit, and I've mentioned, and I'm going to reinforce this now, about some bonuses, free online calculators that are linked in the show notes, which enables you to not only calculate your profit, but do a number of what if scenarios. So, it allows you to say, if I wanted to increase my gross profit and played around the costs and the selling prices, you know, what would the result be?

So, let that do the heavy lifting. Hope you got some value from the show. I'd love it if you could subscribe and encourage your friends and family to do likewise. If you've got any ideas for any future topics on the show, let me know what they are. If you've got any feedback to share, love to hear that.

Hopefully it's all positive, but if there's anything you'd like to see improved and added, I've inhabited the world of feedback for too many years to remember, so let us know. Apart from that, guys, get in touch to see if we can help you increase your profitability, access the world of resources that we've got. Until next week,

have a great week guys. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.