# Gross Profit Logic

This article explains how **Gross Profit** and **Gross Margin** are calculated and used in Model Reef.

You will learn:

* How Gross Profit is derived from Revenue and COGS.
* How Gross Profit interacts with working capital and cash.
* How Gross Margin is used as a key metric across scenarios and branches.

Gross Profit is the first measure of value creation in most models.

***

## 1. Gross Profit definition

In Model Reef:

* **Gross Profit** is defined as:
  * `Gross Profit = Revenue minus COGS`.
* **Gross Margin** is usually expressed as:
  * `Gross Margin = Gross Profit divided by Revenue`.

Revenue and COGS are taken from the P\&L at accrual timing. Gross Profit is therefore an accrual based measure.

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## 2. Gross Profit in the P\&L

In the P\&L:

* Revenue lines are shown at the top.
* COGS lines are shown directly beneath.
* Gross Profit and Gross Margin are calculated automatically from these sections.

You can see Gross Profit and Gross Margin:

* For the whole model.
* Per branch, division or entity.
* Per scenario.
* Over any period range (monthly, quarterly, annual).

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## 3. Gross Profit and working capital

Gross Profit is an accrual metric. Cash realisation depends on:

* Customer payment terms (driving Accounts Receivable).
* Supplier payment terms (driving Accounts Payable).
* Any inventory like timing effects encoded in COGS behaviour.

In the Cash Waterfall:

* Revenue and COGS mirror the P\&L.
* A **Change in net working capital** line adjusts for timing differences.
* This bridges the gap between accrual Gross Profit and cash available from operations.

This bridge is crucial for understanding why a business with strong Gross Margin might still experience cash strain.

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## 4. Gross Profit in scenarios and segmentation

Gross Profit is a key comparison metric across:

* Scenarios (Base, Downside, Upside).
* Branches (divisions, regions, stores).
* Product or channel categories.

Model Reef supports this by:

* Keeping mapping structure consistent across scenarios.
* Allowing branch and category based filters.
* Allowing custom reports and dashboards focused on Gross Profit and Gross Margin.

This makes the model useful for pricing decisions, channel mix analysis and cost optimisation.

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## 5. Gross Profit and valuation

In valuation:

* Gross Profit influences EBITDA and free cashflows.
* Changes in Gross Margin have a leveraged effect on cash generation.
* Improving Gross Margin through pricing or cost changes is often more impactful than chasing top line growth alone.

Model Reef uses Gross Profit and downstream cashflows to calculate FCFF, FCFE, NPV, IRR and money multiple in the valuation engine.

***

## Related articles

* [Promotional Lift/Discount Impact](/use-cases/consumer-goods-fmcg-and-cpg-manufacturers/promotional-lift-discount-impact.md)
* [Build a Discount Rate Scenario Model](/how-tos/valuation/build-a-discount-rate-scenario-model.md)
* [Equity Distribution Logic](/help/financial-outputs-and-valuation/equity-distribution-logic.md)
* [Timing Preview](/syntax/timing-syntax/timing-preview.md)


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