What is gross profit?

Published Thursday 23 July 2026

Table of contents

• What is gross profit?
• The gross profit formula
• What's included in cost of goods sold (COGS)?
• How to calculate gross profit
• Gross profit vs gross profit margin
• Gross profit vs net profit
• Why gross profit matters for your business
• What is a good gross profit margin?
• How to improve your gross profit margin
• Track your gross profit with Xero
• FAQs on gross profit

Key takeaways

• Gross profit is the money left after you subtract the cost of goods sold (COGS) from your total revenue. It shows whether your core business activity is profitable before accounting for other expenses.
• The formula is simple: Gross Profit = Revenue minus COGS. You can also convert it to a percentage (gross profit margin) to benchmark your performance over time or against your industry.
• Gross profit differs from net profit, which deducts all expenses including operating costs, interest and tax. You need both metrics to get a full picture of your financial health.
• Tracking gross profit regularly helps you make smarter pricing decisions, spot rising costs early and identify which products or services deliver the strongest returns.

What is gross profit?

Gross profit is the amount of money your business earns from sales after subtracting the direct costs of producing or delivering your goods and services. It's one of the first profitability figures on your profit and loss (P&L) statement, and it tells you whether your core business activity is generating enough income to cover its direct costs.

If your gross profit is healthy, it means you're earning more from each sale than it costs you to make or deliver that product or service. If it's low or shrinking, it's a signal to look at your pricing or production costs.

The gross profit formula

The gross profit formula is straightforward. You take your total revenue and subtract your cost of goods sold (COGS):

Gross Profit = Revenue minus COGS

Revenue is the total income your business earns from selling goods or services before any costs are deducted. COGS covers the direct costs tied to producing or delivering what you sell. The result is a dollar amount, not a percentage.

What's included in cost of goods sold (COGS)?

Cost of goods sold (COGS) includes only the direct costs involved in producing or delivering your product or service. Understanding what counts as COGS is essential for calculating your gross profit accurately.

For product-based businesses, COGS typically includes:

• Raw materials and components used to make the product
• Direct labour: wages for staff directly involved in production
• Manufacturing overhead: factory rent, equipment depreciation and utilities tied directly to production

For service-based businesses, COGS (sometimes called cost of revenue) includes the direct labour and materials needed to deliver the service.

COGS does not include operating expenses like office rent, marketing, administrative salaries, interest or tax. Those costs come out later when you calculate net profit.

How to calculate gross profit

Calculating gross profit takes 3 steps. Here's how it works using a simple example for an Australian cafe.

1. Determine your total revenue for the period. Say your cafe earns $45,000 in revenue over a month from food and drink sales.
2. Identify your cost of goods sold. Your COGS for the month, including coffee beans, milk, food ingredients and direct kitchen staff wages, comes to $18,000.
3. Subtract COGS from revenue. $45,000 minus $18,000 = $27,000. Your gross profit for the month is $27,000.

That $27,000 is what's left to cover your operating expenses (rent, utilities, marketing) and, ideally, leave you with a net profit.

Gross profit vs gross profit margin

Gross profit and gross profit margin are related but measure different things. It's common to mix them up, so here's the distinction.

Gross profit is a dollar amount: the total money left after subtracting COGS from revenue. Gross profit margin is a percentage that shows how much of every dollar in revenue you keep after covering direct costs.

The formula for gross profit margin is:

Gross Profit Margin = (Gross Profit divided by Revenue) x 100

Using the cafe example above: ($27,000 divided by $45,000) x 100 = 60%. This means for every dollar of revenue, the cafe keeps 60 cents after direct costs.

Use gross profit when you want to see total dollars earned. Use gross profit margin when you want to compare performance across periods, locations or businesses of different sizes.

Gross profit vs net profit

Gross profit and net profit both appear on your P&L statement, but they measure profitability at different levels.

Gross profit only deducts the direct costs of producing your goods or services (COGS). It shows whether your core business activity is profitable. Net profit goes further: it subtracts all remaining expenses, including operating costs, rent, marketing, interest and tax. Net profit is your bottom line.

Here's the key difference: if your gross profit is strong but your net profit is weak, you're pricing and producing well, but your overhead costs are eating into your earnings. If your gross profit itself is low, the problem sits with your pricing, supplier costs or production efficiency.

You need to track both. Gross profit flags pricing and production issues early. Net profit shows whether your overall business is financially healthy after every cost is accounted for.

Why gross profit matters for your business

Gross profit is more than just a number on your P&L. It's a practical tool that helps you run your business more effectively.

• It shows operational efficiency: a healthy gross profit means you're managing production or delivery costs well relative to your revenue.
• It informs pricing decisions: if your gross profit is shrinking, you may need to raise prices or find ways to reduce direct costs.
• It supports benchmarking: compare your gross profit margin against industry averages or your own past performance to spot trends early.
• It signals financial strength to investors and lenders: gross profit margin is one of the first ratios examined in any financial review or loan application.

Reviewing your gross profit regularly, rather than just at the end of the financial year, gives you time to adjust before small issues become bigger problems.

What is a good gross profit margin?

There's no single number that defines a "good" gross profit margin; it depends heavily on your industry.

• Retail and manufacturing businesses typically operate on margins of 20% to 40%, because their cost of goods sold is higher.
• Service-based businesses often achieve margins of 50% to 80%, since their direct costs are lower.
• A gross profit margin above 50% is often cited as healthy, but this varies significantly by sector.

Rather than chasing a universal benchmark, track your own margin over time. A declining margin, even if it's still above average, tells you something is changing in your costs or pricing. Compare against businesses in your industry, not across all industries. Learn how to measure profitability using gross and net margins together for a fuller picture.

How to improve your gross profit margin

If your gross profit margin isn't where you want it to be, there are practical steps you can take to increase your profit.

• Review your pricing: consider incremental price increases or shift to value-based pricing that reflects the true worth of what you deliver.
• Reduce your COGS: negotiate better terms with suppliers, buy materials in bulk or look for ways to reduce waste in your production process.
• Cut underperforming products or services: if certain items consistently deliver low margins, consider repricing them or removing them from your offering.
• Streamline your processes: more efficient workflows and smarter scheduling can reduce direct labour costs without sacrificing quality.

Even small improvements in your gross profit margin can make a meaningful difference over time, especially if you're reinvesting that money back into growing your business.

Track your gross profit with Xero

Knowing your gross profit is useful; tracking it consistently is what makes it powerful. With Xero's reporting tools, you can pull up your profit and loss statement in real time, so you always know where your gross profit stands. Automated bank feeds and reconciliation mean your numbers stay up to date without hours of manual data entry.

Whether you're reviewing your margins month to month or preparing figures for your accountant, Xero gives you a clear view of your business finances in one place. Get one month free.

FAQs on gross profit

Here are some frequently asked questions about gross profit.

What is the difference between gross profit and gross profit margin?

Gross profit is a dollar amount showing how much revenue remains after subtracting COGS. Gross profit margin expresses that figure as a percentage of revenue, making it easier to compare across time periods or businesses.

Is gross profit the same as revenue?

No. Revenue is the total income from sales before any costs are deducted. Gross profit is what remains after you subtract the direct costs of producing or delivering your goods and services.

Is gross profit before or after tax?

Gross profit is before tax. It only accounts for revenue minus cost of goods sold. Tax, along with operating expenses and interest, is deducted later when calculating net profit.

What is a good gross profit margin?

It depends on your industry. Service businesses often see margins of 50% to 80%, while retail and manufacturing typically range from 20% to 40%. Track your own margin over time for the most useful comparison.

How can you increase your gross profit?

You can increase gross profit by raising your prices, reducing direct costs through better supplier terms or bulk purchasing, cutting low-margin products and improving production efficiency.