How to calculate gross profit
Learn what gross profit is and how to calculate it step by step, with the formula and worked examples.
Published Thursday 6 August 2026
Table of contents
How to calculate gross profit
Key takeaways
- Gross profit is the revenue your business earns minus the cost of goods sold (COGS), showing how much you keep after covering direct production or delivery costs.
- The formula is simple: Gross profit = Revenue minus COGS. Use it monthly to spot pricing or cost issues early.
- Gross profit differs from net profit, which subtracts all operating expenses, interest and taxes from your revenue.
- Tracking gross profit over time helps you make informed decisions about pricing, supplier negotiations and operational efficiency.
What is gross profit?
Gross profit is the money your business earns after subtracting the direct costs of producing or delivering your goods and services. It appears on your profit and loss report and tells you whether you're making enough on each sale to cover your other expenses and still turn a profit.
Think of it this way: if you sell handmade candles for HK$200 each and the wax, wicks, jars and labour cost you HK$80 per candle, your gross profit is HK$120 per candle. That HK$120 is what you have left to pay for things like rent, marketing, insurance and your own salary.
For small business owners, gross profit is a useful health check. A healthy gross profit means your pricing and production costs are in good shape. A shrinking gross profit is an early warning sign that something needs attention, whether that's rising supplier costs, underpricing or inefficiencies in how you deliver your service.
Gross profit formula
The gross profit formula is straightforward. Once you know your total revenue and your cost of goods sold, you can calculate gross profit in seconds.
Gross profit = Revenue minus cost of goods sold (COGS)
Here's what each part means:
- Revenue is the total income your business earns from selling goods or services during a specific period, before any deductions. You might also see this called "sales" or "turnover" on financial reports.
- Cost of goods sold (COGS) includes all the direct costs tied to producing or delivering what you sell. For a product business, COGS typically covers raw materials, manufacturing labour and shipping. For a service business, it includes the direct labour and materials needed to deliver the service.
COGS does not include indirect expenses like office rent, marketing, utilities or administrative salaries. Those get subtracted later when calculating net profit.
How to calculate gross profit step by step
Calculating gross profit takes just a few steps. Here's how to do it, whether you're pulling numbers from your accounting software or working from a simple spreadsheet.
1. Determine your revenue
Start by adding up all the income your business earned from sales during the period you're measuring. This could be a month, a quarter or a full year. Include all sales of products or services, but don't include non-operating income like interest earned or one-off asset sales. You'll find revenue on your profit and loss template.
If you use Xero accounting software, you can find your total revenue on your profit and loss report. It's calculated automatically from your invoices and sales transactions.
2. Calculate your cost of goods sold (COGS)
Next, add up all the direct costs involved in producing or delivering your products and services during the same period. Common COGS items include:
- Raw materials and supplies
- Direct labour (wages for employees who make or deliver the product)
- Manufacturing or production costs
- Freight and shipping for inventory
- Packaging materials
If you run a service business, your COGS might include the wages of staff who deliver services, software licences used in delivery or subcontractor fees. The key question is: would this cost disappear if you stopped selling? If yes, it's likely part of COGS.
3. Subtract COGS from revenue
Now apply the gross profit formula. Take your total revenue and subtract your total COGS. The result is your gross profit for that period.
For example, if your business earned HK$120,000 in revenue last quarter and your COGS was HK$45,000:
HK$120,000 minus HK$45,000 = HK$75,000 gross profit
4. Interpret the result
A positive gross profit means you're earning more from sales than it costs to produce what you sell. That's a good sign, but it doesn't mean you're profitable overall. You still need to cover your operating expenses, taxes and other costs.
If your gross profit is negative or very low, it usually means your pricing is too low, your production costs are too high, or both. This is a signal to review your pricing strategy and look for ways to reduce direct costs.
Tracking gross profit over time is more valuable than looking at a single number. Compare it month over month or quarter over quarter to spot trends early.
Gross profit calculation examples
Seeing the formula in action makes it easier to apply to your own business. Here are two examples covering different business types.
Product business example
Sarah runs a small online store selling custom phone cases. In March, she sold 500 cases at HK$240 each, bringing in HK$120,000 in revenue. Her COGS for the month included HK$32,000 in materials, HK$20,000 in direct labour and HK$4,000 in shipping supplies.
Revenue: HK$120,000COGS: HK$32,000 + HK$20,000 + HK$4,000 = HK$56,000Gross profit: HK$120,000 minus HK$56,000 = HK$64,000
Sarah's gross profit of HK$64,000 means she kept 53% of her revenue after covering direct costs. That HK$64,000 needs to cover her website hosting, marketing, insurance and other overhead.
Service business example
Tom runs a small landscaping company. In April, he earned HK$176,000 from client jobs. His COGS included HK$48,000 in crew wages (for time spent on jobs), HK$16,000 in fuel and equipment maintenance, and HK$8,000 in supplies like mulch and fertiliser.
Revenue: HK$176,000COGS: HK$48,000 + HK$16,000 + HK$8,000 = HK$72,000Gross profit: HK$176,000 minus HK$72,000 = HK$104,000
Tom's gross profit of HK$104,000 gives him a strong foundation to cover his truck payments, office expenses, insurance and his own salary.
Gross profit vs. gross profit margin
Gross profit and gross profit margin are related but measure different things. Gross profit is a dollar amount. Gross profit margin is a percentage that shows what proportion of your revenue you keep after covering direct costs.
The gross profit margin formula is:
Gross profit margin = (Gross profit / Revenue) x 100
Using Sarah's phone case business from the earlier example:
Gross profit margin = (HK$64,000 / HK$120,000) x 100 = 53.3%
This means Sarah keeps about 53 cents of every dollar in revenue after paying for materials, labour and shipping. The remaining 47 cents goes toward direct production costs.
Gross profit margin is especially useful for comparing performance across different time periods or against industry benchmarks. Margins vary by industry: retail businesses typically see lower margins (25% to 50%), while service businesses often achieve higher margins (50% to 70% or more).
Note that gross profit margin differs from markup. Margin is calculated as a percentage of the selling price, while markup is calculated as a percentage of the cost. A 50% margin is not the same as a 50% markup, so be careful when comparing the two.
Gross profit vs. net profit
Gross profit and net profit both appear on your profit and loss report, but they answer different questions about your business.
Gross profit shows how much you earn after covering the direct costs of your products or services. It tells you whether your core business activities are profitable.
Net profit shows what's left after you subtract all your expenses, including operating costs (rent, utilities, marketing, salaries), interest and taxes. It tells you how much your business actually earned at the end of the day.
Here's a quick comparison:
- Gross profit = Revenue minus COGS
- Net profit = Revenue minus COGS minus operating expenses minus interest minus taxes
A business can have a strong gross profit but a low or negative net profit if its overhead costs are too high. If that's the case, the issue isn't your pricing or production costs; it's your operating expenses. Knowing where the gap is helps you fix the right problem.
What affects your gross profit?
Several factors can push your gross profit up or down. Understanding them helps you make better decisions about pricing, sourcing and operations.
- Changes in COGS: If your suppliers raise prices or you switch to higher-quality materials, your COGS goes up and your gross profit goes down, even if your sales stay the same.
- Pricing adjustments: Raising your prices increases revenue without changing COGS, which directly boosts gross profit. But pricing too high can reduce sales volume, so it's a balancing act.
- Sales volume: Selling more units can improve gross profit, especially if you benefit from bulk discounts on materials or more efficient production at higher volumes.
- Production efficiency: Improving how you make or deliver your product reduces waste and direct labour costs, improving gross profit without changing your prices.
- Supply chain disruptions: Shipping delays, tariffs or shortages can increase your COGS unexpectedly. Having backup suppliers or negotiating fixed-price contracts can help protect your margins.
How to improve your gross profit
If your gross profit isn't where you'd like it to be, there are practical steps you can take.
- Review your pricing: Check whether your prices reflect the true cost of delivering your product or service. If your costs have gone up but your prices haven't, it's time for an adjustment.
- Negotiate with suppliers: Ask for volume discounts, longer payment terms or explore alternative suppliers. Even small reductions in material costs add up over a year.
- Reduce waste: Look at your production process for inefficiencies. Are you overordering materials? Is there a way to reduce scrap or rework?
- Focus on higher-margin products or services: If some of your offerings have better margins than others, consider putting more sales and marketing effort behind them.
- Track your numbers regularly: Review your gross profit monthly, not just at tax time. Catching a downward trend early gives you more time to respond.
Track your gross profit with Xero
Knowing how to calculate gross profit is the first step. Keeping track of it consistently is what helps you make smarter business decisions over time.
Xero's cloud accounting software pulls your revenue and cost of goods sold into a clear profit and loss report automatically, so you always know your gross profit without crunching the numbers yourself. You can run reports anytime, compare periods side by side, and spot trends before they become problems. Start today and get one month free.
FAQs on gross profit
Here are answers to some common questions about gross profit.
What is a good gross profit margin for a small business?
A good gross profit margin depends on your industry. Retail businesses often see margins between 25% and 50%, while service businesses can range from 50% to 70% or higher. The most important thing is to track your margin over time and compare it to similar businesses in your sector.
Can gross profit be negative?
Yes. A negative gross profit means your cost of goods sold is higher than your revenue. This usually signals a serious pricing or cost problem that needs immediate attention.
Does gross profit include employee salaries?
Only if those employees are directly involved in producing or delivering your product or service. A factory worker's wages are part of COGS, but your office manager's salary is an operating expense that gets subtracted when calculating net profit.
Do you pay tax on gross profit or net profit?
Generally, tax is assessed on your profit after allowable expenses, which is closer to net profit than gross profit. Your taxable income is typically calculated after deducting operating costs, depreciation and other eligible expenses from your revenue.
What's the difference between gross profit and gross income?
Gross profit is your revenue minus cost of goods sold, a measure of what remains after direct production costs. Gross income refers to all money earned before any deductions. The two terms have distinct meanings and usage can vary by context, so check with your accountant if you need to report one specifically.
How often should I calculate gross profit?
Monthly is ideal for most small businesses. This gives you enough data to spot trends without being overwhelmed by daily fluctuations. If your business has seasonal patterns, comparing the same month year over year can be especially helpful.
Related terms
Learn more about gross profit
Handy resources
Advisor directory
You can search for experts in our advisor directory
Profit & Loss template
Download Xero’s profit and loss statement template to show how much money you business is making
Financial reporting
Keep track of your performance with accounting reports
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.