How to calculate profit
Learn how to calculate profit using simple formulas for gross, operating and net profit.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Profit is what's left after you subtract your expenses from your revenue, and it tells you whether your business is making money.
- There are three types of profit: gross profit, operating profit, and net profit. Each one strips out a different layer of costs.
- You calculate profit in stages: start with revenue, take away the cost of goods sold, then operating expenses, then interest and taxes to reach net profit.
- Profit isn't the same as revenue or profit margin. Revenue is your total sales, and profit margin turns your profit into a percentage.
What is profit?
Profit is the money your business keeps after you subtract your expenses from your revenue. In its simplest form, profit = revenue minus expenses.
If you sell $10,000 worth of products and it costs you $7,000 to run the business, your profit is $3,000. Profit shows whether your business is earning more than it spends, which is the clearest sign of whether it's healthy.
The three types of profit
Profit comes in three types, and each one subtracts a different layer of costs. Working through them in order gives you a full picture of how much you actually keep.
Gross profit
Gross profit is what's left after you subtract the cost of goods sold from your revenue. The formula is gross profit = revenue minus cost of goods sold.
Cost of goods sold (COGS) covers the direct costs of making or buying what you sell, such as raw materials, direct labour, and supplier or manufacturing costs. It excludes indirect costs like rent, marketing, administrative salaries, interest, and taxes, which come out at later stages. You can read more in our gross profit glossary term.
Operating profit
Operating profit is gross profit minus your operating expenses. The formula is operating profit = gross profit minus operating expenses.
Operating expenses are the everyday costs of running the business that aren't part of COGS, such as rent, utilities, marketing, and administrative wages. This figure, sometimes shown in our operating profit glossary term, shows how profitable your core operations are before interest and taxes.
Net profit
Net profit is what remains after you take interest and taxes off your operating profit. The formula is net profit = operating profit minus interest and taxes.
You can also reach net profit by taking gross profit and subtracting all other operating expenses, interest, and taxes. Net profit is often called the bottom line, and you can see how it's used in our net profit glossary term.
How to calculate profit: step by step
Calculating profit works best in stages, peeling off one layer of costs at a time. Follow these steps to move from your total sales down to your net profit.
- Determine your revenue by adding up all the sales your business made over the period.
- Subtract the cost of goods sold from your revenue to get your gross profit.
- Subtract your operating expenses from your gross profit to get your operating profit.
- Subtract interest and taxes from your operating profit to get your net profit.
Worked example
A worked example shows how the numbers flow from revenue through to net profit. Imagine a small Canadian retailer with the following figures for the year, all in Canadian dollars (CAD).
- Revenue: $200,000
- Cost of goods sold: $120,000
- Operating expenses: $50,000
- Interest: $5,000
- Taxes: $6,000
Start with gross profit. Take the $200,000 revenue and subtract the $120,000 cost of goods sold, which leaves a gross profit of $80,000.
Next, work out operating profit. Take the $80,000 gross profit and subtract the $50,000 in operating expenses, which gives an operating profit of $30,000.
Finally, calculate net profit. Take the $30,000 operating profit and subtract $5,000 in interest and $6,000 in taxes, which leaves a net profit of $19,000.
Profit vs revenue and profit margin
Profit and revenue are easy to mix up, but they measure different things. Revenue is the total money your business brings in from sales before any costs, while profit is what's left once you subtract your expenses.
Profit margin is different again, because it's a percentage rather than a dollar figure. It shows profit as a share of revenue, so you can compare performance over time or against other businesses, as explained in our profit margin glossary term.
Track your profit with Xero
Once you know how to calculate profit, keeping an eye on it becomes part of running the business. Xero brings your revenue and expenses together in one place with real-time reporting, so you can see your gross, operating, and net profit without the manual admin, and get one month free.
FAQs on calculating profit
Here are answers to some frequently asked questions about calculating profit.
How do I calculate net profit?
Net profit is your operating profit minus interest and taxes. You can also reach it by taking gross profit and subtracting all other operating expenses, interest, and taxes.
What is the difference between gross and net profit?
Gross profit subtracts only the cost of goods sold from revenue, while net profit subtracts every cost, including operating expenses, interest, and taxes. Gross profit shows production efficiency, and net profit shows what the business actually keeps.
What is COGS?
COGS stands for cost of goods sold, which is the direct cost of making or buying the products you sell. It covers items like materials and direct labour, but not overheads like rent or marketing.
Is profit the same as profit margin?
No. Profit is a dollar amount left after costs, while profit margin expresses that profit as a percentage of revenue.
What is a healthy profit?
A healthy profit varies by industry, business size, and stage, so there's no single benchmark. Tracking your net profit and margin over time is the best way to judge whether yours is improving.
Related terms
Learn more about calculating profit
Handy resources
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Income statement template
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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.