Sales revenue refers to the amount of money that comes into a business from selling whatever goods or services that business provides. Gross profit is the sales revenue minus the cost of goods sold, including the cost to manufacture or buy them, plus other per-item costs such as sales commissions and shipping costs.
Although revenue is an excellent metric for determining the amount of money coming into a business through sales, gross profit can better illustrate the total sum that is gained or loss through transactions, purchases and operational costs.
Thinking About Sales Revenue
For any business that sells goods or provides services, one of the simplest measurements to examine is the business's sales revenue. That is the amount of money consumers pay for a company's goods or services. For example, if a cellphone-case store sells 100 cases at $5 apiece, its sales revenue is $500.
Note that sales revenue doesn't necessarily reflect all revenue coming into the business. If the business has an interest-bearing account or a stake in other businesses that pay a dividend, that isn't reflected in sales revenue. Nor is money coming into the business from loans or sale of its shares.
Sales revenue also doesn't subtract any of the costs of doing business, so it isn't possible with simply that number to determine if a business is profitable.
Calculating Gross Profits
Gross profits often are defined as sales revenue minus the cost of goods sold. For example, that cellphone-case store must buy or manufacture those cases. But it also might pay commission to a salesperson for each case sold, might pay to have some cases shipped directly to remote consumers who buy online instead of stopping in a physical store, and might pay credit-card fees on purchases not made in cash.
All of the costs associated with the production, acquisition and sale of individual goods are subtracted from sales revenue to compute gross profits. So-called fixed costs that don't scale with the number of items sold, such as rent paid on a store, depreciation on business equipment, regular insurance premiums and advertising costs, are not subtracted.
If the company is losing money on each item sold, such as if the cost of the item plus sales commissions come out to more than customers are paying per item, the gross profit can be negative.
Gross Profit Margin
One way to use the gross profit and sales revenue numbers to evaluate businesses is to compute what's called the gross profit margin. That number simply consists of the gross profit divided by the sales revenue and effectively approximates how much a company actually gets to keep from every new dollar in sales that comes in the door.
That number can be used to compare a company's performance at different points or to compare two different companies at the same point in time.