What is gross profit?
Gross profit is what is left of a job's revenue after the costs that only exist because of that job: crew, freelancers, equipment rental, locations, talent, travel, music, post vendors and, in most agency accounting, the time of the staff who worked on it. It does not yet account for rent, software, admin salaries, the owner's time selling or any other cost of keeping the agency open. Those come off later, on the way to operating and net profit.
Expressed as a percentage of revenue it is the gross margin. Expressed per project it is the single most useful number a producer can see at wrap, because it says whether the estimate was right.
Why it matters
Why gross profit matters
Gross profit is the money that pays for the agency. Every cost that is not direct, which is to say the whole overhead, has to be covered from it, and whatever is left after that is the real profit. If the gross profit across all the jobs in a year is smaller than the overhead, the agency loses money no matter how busy it was. Tracking it per job shows which clients and kinds of work are carrying the business and which are being carried.
It is also the number that pricing is built on. An agency that knows its overhead knows the gross margin it needs on each job, and a job that cannot be priced to deliver that margin is a job to walk away from or reshape.
In practice
How gross profit works in practice
- 01
The agency defines what counts as a direct cost and sticks to it, so the number means the same thing on every job. Pass-through production costs are always direct. Staff time on the job is usually counted as direct too, at a loaded hourly cost, which is why time tracking matters even on fixed-fee work. Revenue is recognized when the work is earned, not when the invoice is sent.
- 02
At wrap, direct costs are totaled against revenue to give the project's gross profit and gross margin, and compared to what the estimate assumed. Monthly, the same calculation across all active work gives the agency's gross profit for the period, which is set against overhead to see whether the month covered itself. Annually, gross margin by client and by type of work shows where the business should lean.
Watch out
What people get wrong about gross profit
Leaving staff time out of direct costs. A fixed-fee project with no freelancers and no pass-through costs shows a hundred percent gross margin on paper, which is nonsense if six people spent a month on it. The second mistake is reading gross profit as profit. A healthy gross margin with an overhead that outgrows it still ends in a loss. The third is calculating it only at year end, when the jobs that lost money are long finished and the lesson is a year late.
