# Gross Profit Definition | How to Calculate It With Formulas and Examples

Calculating gross profit margin leaves many people scratching their heads in confusion. If you’ve looked over your P&L (profit and loss) statement, it’s understandable why you might be struggling to formulate a solid number.  One of the most common mistakes that business owners make is to skip to the bottom of the P&L for their net profit. While it’s true that this number gives you a general ballpark of profits, it doesn’t take into account operating costs or gross profit.  Without these figures factored into the formula, you’re not going to get a definitive analysis. It’s important to know what data needs to be included in your report and how it affects your gross profit.  To ensure that your business accounting is accurate and correct, our experts here at Seek Capital have put together this handy resource for calculating gross profit.

## Gross Profit Defined

Your business’s gross profit is the amount of money you have made after deducting costs associated with producing and selling your product or service. While the formula is simple enough on paper, there are some important components that need to be factored into the equation.

### Fixed Costs

These are the costs that never change throughout the production of your goods. Some examples of fixed costs are things like the rent and taxes you pay on your building or warehouse, business insurance, and paid salaries, taxes, and benefits to your employees.

### Variable Costs

Unlike fixed costs, variable costs can change throughout production. These are expenses like materials used in the manufacturing of your goods, costs associated with shipping your goods, employees paid hourly, fees associated with credit cards, and any commissions earned by your sales staff. As you can see, both fixed and variable costs play a huge role in your gross profit. If you can learn how to keep both of these costs to a minimum, you’re more likely to enjoy a higher gross profit.

## Calculating Gross Profit Margin

Now that you have the formula for calculating gross profit, you can use it to figure out your business’s gross profit margin. Basically, gross profit is the monetary amount that your company makes, while the gross profit margin is the percentage of that amount.  Factoring gross profit margin is necessary to see how efficient your business is in its operations.  To figure out what your gross profit margin is, you will need to divide your gross profit by your total revenue and multiply the outcome by 100. Using the values from above, let’s observe the formula for determining your gross profit margin. \$14,000 (gross profit) ÷ \$20,000 (revenue) = 0.7 X 100 = 70% gross profit margin