What it means in practice
It shows what remains after the costs classified as cost of sales. It does not automatically include every operating expense, finance cost or tax. The classification matters, especially in service businesses where delivery labour can be treated differently. Compare like with like and explain the cost basis. Gross profit and contribution are related but not interchangeable when fixed and variable costs are grouped differently. A change in gross profit can arise from price, product mix, direct costs or volume. Investigate those components rather than assuming a lower percentage always reflects a purchasing problem. Use the same classification of cost of sales in each period. Otherwise a change in accounting presentation can look like an operating improvement or deterioration when the underlying trading activity has not changed.
A fictional worked example
Revenue of ₦1 million less a stated cost of sales of ₦650,000 gives gross profit of ₦350,000 before other expenses.
A useful question
Which costs are included in your cost of sales, and are they consistent each month?
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