How to calculate gross profit
Gross profit is your revenue minus the cost of goods sold. Here's the formula, an example, and how to use it.
Published Thursday 23 July 2026
Table of contents
How to calculate gross profit
Key takeaways
- Gross profit is what’s left when you subtract the cost of goods sold (COGS) from your revenue.
- The formula is simple: gross profit = revenue minus COGS.
- Gross profit is a dollar figure, while gross profit margin turns that figure into a percentage of revenue.
- Gross profit sits above net profit, which is what remains after you also pay all other operating expenses and taxes.
What is gross profit?
Gross profit is your revenue minus the cost of goods sold (COGS). It’s one of the first numbers you see on your profit and loss statement, and it shows how much money your products or services make before you cover the rest of your running costs.
Think of it as the profit from your core trade. If you sell handmade furniture, your gross profit is what’s left from each sale after you’ve paid for the wood, the fabric, and the labour that goes into building it. It doesn’t yet account for rent, marketing, or your accounting software.
Gross profit formula
The gross profit formula is short and easy to remember. You take your total revenue for a period and subtract the cost of goods sold.
Gross profit = revenue minus cost of goods sold (COGS)
Revenue is the money you bring in from sales before any costs come out. COGS is the direct cost of producing what you sell. Subtract one from the other and you’re left with your gross profit.
How to calculate gross profit
You can work out your gross profit in three quick steps once you have your sales and cost figures for a period. Here’s how to do it.
- Add up your total revenue for the period.
- Work out your cost of goods sold for the same period.
- Subtract COGS from revenue to get your gross profit.
Example of a gross profit calculation
A simple example makes the formula easier to picture. Say your business earns $20,000 in sales over a month.
If the direct costs of producing those sales come to $8,000, you subtract that from your revenue: $20,000 minus $8,000. That leaves you with $12,000 in gross profit for the month.
What’s included in cost of goods sold (COGS)?
The cost of goods sold covers the direct costs of making the products or services you sell. It leaves out the indirect costs of simply running your business, so it’s worth knowing which is which.
Direct costs that usually belong in COGS include:
- Raw materials and parts used to make your products
- Direct labour for the people who build or deliver what you sell
- Production costs such as factory supplies and equipment running costs
Indirect or operating costs sit outside COGS. Rent, marketing, office salaries, and insurance keep the business going, but they aren’t tied to producing a specific sale, so they’re accounted for later.
Gross profit vs gross profit margin
Gross profit and gross profit margin measure the same thing in different ways. Gross profit is a dollar figure, while the gross profit margin shows that profit as a percentage of your revenue.
You work out the margin like this: (revenue minus COGS) ÷ revenue × 100. Using the earlier example, ($20,000 minus $8,000) ÷ $20,000 × 100 gives you a gross profit margin of 60%.
The dollar figure tells you how much you kept. The percentage tells you how efficiently you kept it, which makes it easy to compare across months or products of different sizes.
Gross profit vs net profit
Gross profit and net profit sit at different points on your profit and loss statement, so it helps to keep them clear. Gross profit is revenue minus COGS, and it appears near the top.
Your net profit is what’s left further down, after you subtract all your other operating expenses and taxes from gross profit. Gross profit shows how well your core trade performs, while net profit shows what the whole business actually earns.
Why gross profit matters for your business
Gross profit is one of the clearest signals of how healthy your core business is. It shows whether your prices and production costs leave enough room to cover everything else and still turn a profit.
Tracking it over time helps you set prices with confidence, spot rising costs early, and decide which products are worth pushing. It’s also a practical starting point when you want to measure profitability across your business.
How to improve your gross profit
Improving gross profit comes down to widening the gap between revenue and direct costs. A few practical moves can help you do that.
- Raise your prices where the market allows
- Reduce direct costs by negotiating with suppliers
- Improve production efficiency to cut waste and rework
- Review your product mix to focus on higher-margin lines
See your profit clearly with Xero
When your sales and costs live in one place, your gross profit stays easy to track. Xero’s reporting brings your numbers together so you can watch your margins in real time, and you can get one month free.
FAQs on gross profit
Here are answers to some frequently asked questions about gross profit to help you use the figure with confidence.
What is a good gross profit margin?
A good margin depends heavily on your industry, so compare yourself against similar businesses rather than a single benchmark. Service businesses often run higher margins than product businesses because they carry lower direct costs.
What is the difference between gross profit and net profit?
Gross profit is revenue minus the cost of goods sold, so it reflects your core trade. Net profit goes further, subtracting all other operating expenses and taxes to show what the business keeps overall.
What is included in cost of goods sold?
COGS includes the direct costs of producing what you sell, such as raw materials, direct labour, and production costs. It leaves out indirect costs like rent, marketing, and office salaries.
How can I improve my gross profit?
You can lift gross profit by raising prices, trimming direct costs, or making production more efficient. Reviewing your product mix and dropping low-margin lines can also help.
Related terms
Learn more about gross profit
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.