Gross profit is the money a hospitality or catering business has left after paying for the food, drinks and other items sold to customers. It is an important measure of business success because it helps an owner judge whether prices are suitable and whether ingredients are being controlled effectively. In this guide, you will learn the formula for gross profit, how to use it in a catering example and how it differs from net profit. These ideas are useful for revision of WJEC Level 1/2 Hospitality and Catering, particularly the business success section of hospitality and catering provision.
What does gross profit mean?
Gross profit is the difference between a business’s sales revenue and its cost of sales.
- Sales revenue is the total money received from selling food, drink or catering services.
- Cost of sales is the direct cost of the items sold, such as ingredients used to make meals or drinks served to customers.
- Gross profit is what remains after the cost of sales has been taken away from sales revenue.
Gross profit does not mean that the business has made this amount as its final profit. The business may still need to pay other costs, such as rent, wages, energy, insurance and advertising. These are usually treated as overheads or operating costs. After these costs have been deducted, the business can work out its net profit.
The gross profit formula
Use this formula:
Gross profit = sales revenue − cost of sales
For example, imagine a small café sells lunches worth £1,200 during one week. The ingredients used for those lunches cost £450.
| Calculation | Amount |
|---|---|
| Sales revenue | £1,200 |
| Less: cost of sales | £450 |
| Gross profit | £750 |
£1,200 − £450 = £750 gross profit
This means the café has £750 left before other business costs are considered. It does not mean the owner can take £750 as personal income.
How is sales revenue calculated?
If a question gives the number of items sold and the selling price, calculate sales revenue first:
Sales revenue = quantity sold × selling price
For example, a food outlet sells 80 sandwiches at £4 each:
80 × £4 = £320 sales revenue
If the ingredients for those sandwiches cost £120:
£320 − £120 = £200 gross profit
Read the information in a calculation carefully. Make sure you use the correct quantity, selling price and cost of sales. Show each stage of your working so that your answer is easy to follow.
What counts as cost of sales?
Cost of sales should relate directly to the products or services sold. In a catering business, this could include:
- ingredients used in meals, such as vegetables, meat, flour or dairy products;
- drinks and purchased food items resold to customers;
- disposable packaging used for takeaway products, where it is treated as a direct cost by the business.
The exact records used by a business can vary. For examination questions, use the figures and labels provided. Do not add costs that have not been included in the question.
Gross profit percentage
A business may also compare gross profit with sales revenue by calculating the gross profit percentage. This shows gross profit as a percentage of sales revenue.
Gross profit percentage = (gross profit ÷ sales revenue) × 100
Using the café example:
(£750 ÷ £1,200) × 100 = 62.5%
The café has a gross profit percentage of 62.5%. This means that, before other costs are taken into account, 62.5% of its sales revenue remains after paying the direct cost of the lunches.
When comparing businesses or different time periods, check that the figures have been calculated in the same way. A percentage can make comparisons fairer when businesses have different levels of sales revenue.
Why is gross profit important in catering?
Gross profit can help a hospitality and catering business to:
- check whether selling prices cover the direct cost of products;
- identify whether ingredient costs are becoming too high;
- compare the profitability of different menu items;
- make decisions about portion sizes, suppliers and menu design;
- monitor performance over time.
For example, a dish may sell well but produce only a small gross profit if its ingredients are expensive. Another dish may sell fewer portions but produce a larger gross profit per portion. A catering manager could use this information alongside customer preferences, nutrition, quality and waste when reviewing a menu.
Gross profit is therefore one measure of business success, not the only measure. A business also needs to consider customer satisfaction, reputation, efficiency, sales, costs and whether it is meeting its aims.
Gross profit and net profit
These terms are related but they are not interchangeable.
| Term | Meaning |
|---|---|
| Gross profit | Sales revenue minus the direct cost of the goods or services sold. |
| Net profit | The amount left after other relevant business costs have also been deducted. |
For example, if a café has a gross profit of £750 and then pays £500 in other costs, its net profit would be £250, using the figures provided. If those other costs were higher than £750, the business would make a loss for that period.
Teacher Tip: Encourage yourself to write the formula before entering any numbers. Then label every figure, complete the calculation and include the correct currency symbol or percentage sign. In a written answer, explain what the result shows for the catering business rather than giving a number without context.
Common mistakes to avoid
- Subtracting sales revenue from cost of sales instead of cost of sales from sales revenue.
- Confusing gross profit with net profit.
- Using overheads in the gross profit calculation when the question asks only for cost of sales.
- Forgetting to multiply quantity by selling price when sales revenue is not given.
- Leaving out the percentage sign when calculating gross profit percentage.
- Rounding too early, which can change the final answer.
Exam-ready retrieval checklist
- Can you define sales revenue?
- Can you define cost of sales?
- Can you write gross profit = sales revenue − cost of sales?
- Can you calculate sales revenue from quantity and selling price?
- Can you distinguish gross profit from net profit?
- Can you explain one way gross profit helps a catering business?
- Can you calculate and interpret gross profit percentage?
For the current WJEC specification and assessment information, check the official WJEC hospitality and catering specification. Specifications and related guidance can change, so use the latest official information when revising.
Frequently asked questions
Is gross profit the same as money in the bank?
No. Gross profit is a calculation based on sales revenue and cost of sales. The business may still need to pay other costs before it knows its net profit and available cash.
Can a business have high sales but low gross profit?
Yes. If the direct cost of ingredients or products is high compared with the selling price, only a small amount may remain as gross profit.
Why might a catering business compare gross profit percentages?
A percentage can help compare performance between menu items or periods with different sales totals, provided the figures are calculated consistently.