What is Gross profit?

How to calculate it

Gross profit = revenue − cost of goods sold

Gross profit margin expresses it as a percentage: gross profit ÷ revenue × 100. The margin is the more useful figure, because it compares across periods and sites where dollars do not.

Both figures must be calculated on GST-exclusive amounts if you are registered for GST — see below.

Do wages belong in cost of sales?

This is the decision that determines whether your gross profit means anything, and there is no single right answer — only a consistent one.

• Wages in cost of sales — common in hospitality and services, where labour is what you sell. Gross profit then reflects the true cost of delivery
• Wages in operating expenses — common in retail, where the direct cost is stock. Gross profit then measures the product margin alone

Pick one and never move it mid-year. A café that shifts wages between the two lines will show a gross margin swing of thirty points that has nothing to do with trading. Whichever you choose, track labour cost as a percentage of revenue separately — it is the number that actually moves week to week.

GST-exclusive, always

If you are registered for GST, revenue and costs go into the calculation GST-exclusive. GST you collect is not revenue and GST you pay is not a cost — both sit as balance sheet items until the BAS settles them.

Using GST-inclusive figures on both sides leaves the dollar profit roughly right by accident, but every margin percentage wrong and every benchmark comparison meaningless.

Key takeaways

• Gross profit = revenue − cost of goods sold; the margin percentage is the useful form
• Whether wages sit in cost of sales is a choice — make it once and hold it
• Use GST-exclusive figures if you are registered
• Track labour cost percentage separately whichever treatment you choose

Our free profit and loss template calculates all three profit lines and their margins.