How to calculate profit

Published Thursday 23 July 2026

Table of contents

• What is profit?
• The three types of profit
• How to calculate profit step by step
• Worked example: calculating profit
• Profit vs profit margin
• Fixed costs, variable costs and cost of goods sold
• How to improve your profit
• See your profit clearly with Xero
• FAQs on calculating profit

Key takeaways

• Profit is what's left when you subtract your expenses from your revenue, and it shows whether your business is making money.
• There are three types of profit: gross profit, operating profit and net profit, each stripping out more costs than the last.
• Profit margin turns your profit into a percentage of revenue, so you can compare performance over time or against other businesses.
• You can lift profit by increasing sales or reducing costs, and clear reporting helps you see which levers are working.

What is profit?

Profit is what's left when you subtract your expenses from your revenue. The basic profit formula is revenue minus expenses, and the result tells you whether your business made or lost money over a period.

Revenue is the total income you earn from selling goods or services. Expenses are everything it costs to run your business, from stock and wages to rent and interest.

When revenue is higher than expenses, you've made a profit. When expenses are higher than revenue, you've made a loss, so tracking profit regularly helps you spot problems early and make confident decisions.

The three types of profit

Profit isn't a single number. As you work down your profit and loss statement, you subtract more costs at each stage, which gives you three types of profit that each tell a different story about your business.

Gross profit

Gross profit is your revenue minus the direct cost of producing your goods or services. The formula is gross profit = revenue minus cost of goods sold (COGS). It shows how efficiently you turn stock and production into sales, before you account for the wider costs of running the business.

Operating profit

Operating profit takes gross profit and removes the day-to-day costs of running your business. The formula is operating profit = gross profit minus operating expenses. Operating expenses include things like rent, wages, marketing and utilities, so this figure reflects how well your core operations perform.

Net profit

Net profit is the amount left after every cost is accounted for, and it's often called your bottom line. The formula is net profit = operating profit minus interest and tax. This is the profit you actually keep, and it's the clearest measure of whether your business is financially healthy.

How to calculate profit step by step

Calculating profit is a matter of working through your figures in order, subtracting more costs at each stage. Follow these steps to move from revenue all the way down to net profit.

1. Determine your total revenue for the period by adding up all income from sales of goods or services.
2. Subtract your cost of goods sold from revenue to find your gross profit.
3. Subtract your operating expenses from gross profit to find your operating profit.
4. Subtract interest and tax from operating profit to find your net profit.

Worked example: calculating profit

A worked example makes the formulas easier to apply to your own numbers. Imagine a small Melbourne café that wants to work out its profit for the year.

The café earns $400,000 in revenue from coffee and food sales. Its cost of goods sold, covering beans, milk, food and packaging, comes to $150,000.

Here's how the three types of profit work out for the café:

• Gross profit: $400,000 revenue minus $150,000 COGS equals $250,000
• Operating profit: $250,000 gross profit minus $170,000 operating expenses (rent, wages and utilities) equals $80,000
• Net profit: $80,000 operating profit minus $20,000 interest and tax equals $60,000

So the café keeps $60,000 as net profit. That's the figure the owner can reinvest, save, or draw from after every cost has been paid.

Profit vs profit margin

Profit is a dollar amount, while profit margin is that profit shown as a percentage of revenue. Margin is useful because it lets you compare performance over time or against other businesses, even when their sales figures are very different.

To calculate gross profit margin, use (gross profit divided by revenue) times 100. Using the café example, that's ($250,000 divided by $400,000) times 100, which equals 62.5%.

To calculate net profit margin, use (net profit divided by revenue) times 100. For the café that's ($60,000 divided by $400,000) times 100, which equals 15%. You can read more in the Xero guide to profit margin.

Fixed costs, variable costs and cost of goods sold

Understanding how your costs behave makes it easier to calculate profit and plan ahead. Costs generally fall into a few clear categories.

• Fixed costs stay the same regardless of how much you sell, such as rent, insurance and salaries
• Variable costs rise and fall with your sales volume, such as raw materials, packaging and delivery
• Cost of goods sold covers the direct costs of producing what you sell, including materials and the labour tied directly to production

Sorting your costs this way helps you see which expenses you can flex quickly and which are locked in. It also feeds directly into your gross and operating profit calculations, and into how you measure profitability over time.

How to improve your profit

Once you can calculate profit, the next step is lifting it, and there are two broad levers to pull: growing your revenue and trimming your costs. Small changes to either can add up over a full year.

One of the main ways to lift profit is to increase sales: bring in more customers, sell more to existing customers, or review your prices. According to Xero Small Business Insights, Australian small business sales rose 6.7% year on year in the December 2025 quarter, the strongest result since the June quarter 2023, so there's room to grow revenue when you focus on the right levers.

Reducing costs is the other lever. Review your fixed and variable expenses, renegotiate with suppliers, and cut spending that doesn't add value, all of which flow straight through to your net profit.

Keeping an eye on the numbers is what ties it together. When you run financial reports regularly, you can see which changes are working and adjust before small issues become big ones.

See your profit clearly with Xero

Working out your profit is far simpler when your income and expenses live in one place. Xero accounting software brings your income and expenses together in one place and helps turn them into clear reports, so you can track gross, operating and net profit with less manual admin.

You can also start from a ready-made profit and loss sheet template to see the full picture at a glance. See where your business stands and get one month free.

FAQs on calculating profit

Here are answers to some frequently asked questions about calculating profit to help you apply the formulas with confidence.

What is the formula for calculating profit?

The core formula is revenue minus expenses, and a positive result means you've made a profit. Which expenses you subtract depends on whether you want gross, operating or net profit.

How do you calculate net profit?

Start with operating profit, then subtract interest and tax to reach net profit. It's the final figure on your profit and loss statement, showing what your business actually keeps.

What is the difference between gross profit and net profit?

Gross profit only subtracts the direct cost of what you sell, so it reflects production efficiency. Net profit subtracts every remaining cost, including operating expenses, interest and tax, giving your true bottom line.

How do you calculate profit margin?

Divide your profit by your revenue, then multiply by 100 to get a percentage. This works for gross or net margin, depending on which profit figure you start with.

What is the difference between fixed and variable costs?

Fixed costs stay the same no matter how much you sell, like rent and insurance. Variable costs change with your sales volume, like materials and delivery.