How to calculate profit
Learn the profit formula, how to calculate gross, operating and net profit, and why tracking profit matters.
Published Thursday 6 August 2026
Table of contents
Key takeaways
- Profit is the money left after subtracting all expenses from revenue, calculated as Profit = Revenue − Expenses.
- Gross profit, operating profit and net profit each measure profitability at a different stage, from production costs through to interest and tax.
- Profit margin expresses profit as a percentage of revenue, making it easier to compare performance across periods or businesses.
- Tracking profit regularly helps you budget, secure funding and make confident decisions about pricing and costs.
What is profit?
Profit is the amount of money your business keeps after paying all expenses. In simple terms, it's revenue minus expenses.
Revenue is the total income your business earns from selling goods or services before any costs are deducted. Expenses include every cost incurred to run the business, from rent and wages to materials and marketing.
The profit formula
The basic profit formula is:
Profit = Revenue − Expenses
Within expenses, you'll encounter two broad categories. Fixed costs remain constant regardless of sales volume, such as rent, insurance and salaries. Variable costs rise or fall with production, such as raw materials, packaging and shipping.
Cost of goods sold (COGS) is a specific subset of variable costs. It covers the direct costs of producing goods, including materials and direct labour. Many businesses use a profit and loss statement template to organise revenue, COGS and other expenses in one place.
Gross, operating and net profit
Profit can be measured at different stages of your business operations. Each level tells you something distinct about where money is made and where it goes.
Gross profit
Gross profit shows how much remains after covering the direct costs of producing your goods or services.
Gross profit = Revenue − COGS
A strong gross profit indicates efficient production, while a weak one may signal that materials or labour costs need attention. You can learn more about interpreting this figure in the guide to gross profit margin.
Operating profit
Operating profit measures what's left after subtracting day-to-day running costs from gross profit.
Operating profit = Gross profit − Operating expenses
Operating expenses include rent, utilities, marketing and administrative salaries. This figure reflects how well your core business activities generate earnings before financing costs and taxes.
Net profit
Net profit is the final amount remaining once all costs, including interest and tax, have been paid.
Net profit = Operating profit − Interest and tax
Net profit is often called the bottom line. It represents the true earnings available to reinvest or distribute to owners.
Profit vs profit margin
Profit is a dollar amount, while profit margin expresses that amount as a percentage of revenue. This percentage makes it easier to compare profitability across different time periods or against other businesses of varying sizes.
The formula is:
Profit margin = Profit ÷ Revenue × 100
You can apply this formula to gross, operating or net profit. For a deeper look at what the result means, see the guide on profit margin.
How to calculate profit step by step
Follow these steps to work out your profit at each level.
- Gather your total revenue for the period.
- Subtract COGS from revenue to find gross profit.
- Subtract operating expenses from gross profit to find operating profit.
- Subtract interest and tax from operating profit to find net profit.
Worked example
Imagine a small retail business in Hong Kong with the following figures for one quarter.
- Revenue: HK$500,000
- COGS: HK$300,000
- Operating expenses: HK$120,000
- Interest and tax: HK$30,000
Using the formulas above:
- Gross profit = HK$500,000 − HK$300,000 = HK$200,000 (gross margin 40%)
- Operating profit = HK$200,000 − HK$120,000 = HK$80,000 (operating margin 16%)
- Net profit = HK$80,000 − HK$30,000 = HK$50,000 (net margin 10%)
Each margin shows profitability at a different stage, helping you pinpoint where costs have the biggest impact.
Why calculating profit matters
Knowing your profit gives you a clear view of financial health. You can set realistic budgets, plan for growth and present credible numbers when seeking funding. Regular profit tracking also sharpens decision-making, from adjusting prices to negotiating supplier contracts.
Several profitability ratios go beyond the basic profit figure, helping you benchmark performance against industry standards. A healthy net profit margin often falls between 5% and 20%, though the target varies by industry.
To improve profit, consider reviewing pricing to ensure margins cover all costs, reducing unnecessary expenses, improving operational efficiency and retaining loyal customers. Running financial reports regularly helps you spot trends early and act before small issues become costly.
Calculate profit with confidence using Xero
Xero's profit and loss reports pull your revenue and expenses together automatically, so you can see gross, operating and net profit without manual calculations. With real-time data at your fingertips, you can make faster decisions and stay on top of your financial goals.
Ready to try it? You can get one month free and explore the reporting tools yourself.
FAQs on calculating profit
Below are common questions about calculating and understanding profit.
What is the difference between profit and revenue?
Revenue is the total income from sales before any costs are deducted. Profit is what remains after subtracting all expenses from that revenue.
What is the difference between profit and profitability?
Profit is a specific dollar amount at a point in time. Profitability refers to a business's ongoing ability to generate profit relative to its costs, assets or equity.
What is a good profit margin?
A good net profit margin typically ranges from 5% to 20%, but the ideal figure depends on your industry. Service-based businesses often achieve higher margins than retail or manufacturing.
How do you calculate profit margin?
Divide profit by revenue and multiply by 100. Apply this formula to gross, operating or net profit depending on the insight you need.
What factors affect profit?
Pricing strategy, cost of goods, operating expenses, sales volume and tax obligations all influence profit. External factors such as market conditions and competition also play a role.
Related terms
Learn more about profit
Handy resources
Advisor directory
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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.