What exactly is gross profit?
Gross profit is what remains after you subtract the direct cost of doing a job from what you charged for it. Those direct costs are things like materials, parts, and the labor tied to the work. What is left is what the rest of the business runs on.
Why does it matter more than total sales?
Gross profit, not revenue, is what actually pays your bills. Here is what it has to stretch to cover.
- Your overhead: rent, insurance, office staff, software
- Loan and equipment payments
- Taxes you owe
- Your own pay and any profit left over
How does gross margin work?
Gross margin is gross profit written as a percentage of sales. Say you sell a job for $1,000 and the direct costs are $600. Your gross profit is $400 and your gross margin is 40 percent. That percentage tells you how much of every dollar is left to run the business.
What if your gross profit is too thin?
If too little is left after direct costs, then selling more just creates more work for the same empty result. Thin margins are usually a pricing or job-cost problem. Fix the margin first, and every other number gets easier.