Gross Profit for small business owners – Switchboard Finance

Gross Profit

Gross Profit is the amount a business earns after subtracting its direct costs, also known as Cost of Goods Sold (COGS). Lenders use Gross Profit to understand operational efficiency when assessing Business Loans, Working Capital Loans, and Equipment Finance. Related terms: Revenue, Profit, Net Income. Useful hub: Business Owners Finance Hub.

Why Gross Profit Matters

Gross Profit shows how efficiently a business turns materials, labour, or services into income. Strong Gross Profit improves the business's ability to manage cashflow and repay loans.

  • Indicates business efficiency
  • Helps assess repayment ability
  • Used in profit margin calculations
  • Identifies production or service cost control issues
  • Used alongside Net Income for borrowing capacity reviews

How Gross Profit Is Calculated

  • Gross Profit = Revenue – Cost of Goods Sold (COGS)
  • COGS includes materials, direct labour, and manufacturing/service costs
  • Gross Profit Margin (%) = (Gross Profit ÷ Revenue) × 100
  • Lenders compare Gross Profit over multiple years
  • Used in cashflow forecasting and lending risk assessment

Businesses with strong Gross Profit margins are generally better positioned for Business Lines of Credit and cashflow solutions like Invoice Finance.

Official reference: business.gov.au

Is Gross Profit the same as Net Profit?
No — Gross Profit is before overheads, while Net Profit is after all expenses and tax.
Does Gross Profit include tax?
No — Gross Profit is calculated before tax and general business expenses.
Is Gross Profit important for lenders?
Yes — lenders use it to judge efficiency and capacity to handle repayments.
Can Gross Profit be negative?
Yes — negative Gross Profit means the business loses money on each sale, making finance approvals unlikely.
What affects Gross Profit?
Pricing, material costs, labour efficiency, supplier contracts, and business model changes can all impact it.