Gross profit is your revenue minus the cost of goods sold (COGS). It shows how much money remains from sales after covering direct production or purchasing costs.
Gross profit is the first level of profitability on your profit and loss statement. It is calculated as total revenue minus cost of goods sold (COGS). Gross profit tells you how much money is left from each dollar of sales after paying for the direct costs of producing or purchasing your goods/services. The gross profit margin (gross profit divided by revenue, expressed as a percentage) is a key metric that indicates your pricing effectiveness and production efficiency. A declining gross margin suggests rising costs or pricing pressure. A healthy gross margin varies by industry: retail might be 30-50%, services 50-70%, and software 70-90%. Gross profit must cover all your operating expenses (rent, wages, marketing, admin, etc.) before contributing to net profit. If your gross profit does not cover operating expenses, you are operating at a loss regardless of how much revenue you generate. SortBooks helps track gross profit accurately by correctly separating COGS from operating expenses in Xero.
SortBooks helps with the bookkeeping behind gross profit by connecting to your Xero account and using AI to suggest the right account for transactions sitting in catch-all accounts, learning from your own past coding. Instead of fixing gross profit by hand, you review each suggestion, approve it, and SortBooks updates Xero, GST code included. Then ask the AI CFO about your numbers, using live Xero data.
COGS represents the direct costs of producing or purchasing the goods your business sells. It includes raw materials, direct labour and manufacturing overhead but not selling or administrative expenses.
Revenue (also called sales, income or turnover) is the total amount earned from selling goods or services before any expenses are deducted. It is the top line of the P&L.
Gross margin is your gross profit expressed as a percentage of revenue. It shows what percentage of each sales dollar remains after covering direct costs.
Net profit (also called net income or the bottom line) is your total revenue minus all expenses, including COGS, operating expenses, interest and tax. It is the final profit figure.
The P&L (also called the income statement) shows your business revenue, expenses and resulting profit or loss over a specific period.
Connect Xero, check the AI's suggestions and approve the changes. SortBooks updates Xero for you.