Gross profit
Learn what gross profit is, how to calculate it, and why it matters for your small business.
Published Thursday 6 August 2026
Table of contents
Gross profit is what’s left after paying for the things you’ve sold to customers
Key takeaways
- Gross profit is the money left after subtracting the cost of goods sold from your revenue.
- Gross profit is not what you keep because operating expenses and Hong Kong profits tax still come out.
- Calculate gross profit with the formula: revenue − cost of goods sold. For example, HK$500,000 revenue minus HK$300,000 cost of goods sold equals HK$200,000 gross profit.
- Tracking gross profit shows how efficiently you produce or sell your goods and services before overheads.
What is gross profit?
Gross profit is the money left after subtracting the cost of goods sold from your revenue. This figure shows how much you earn from sales before accounting for the broader costs of running your business.
Gross profit is not what you keep. Operating expenses such as rent, marketing and admin costs still come out, along with Hong Kong profits tax. You'll find gross profit on your profit and loss statement, where it helps you assess how well your core business activities perform.
How to calculate gross profit
The formula for gross profit is straightforward: gross profit = revenue − cost of goods sold. Here's a worked example using Hong Kong dollars.
- Start with your total revenue. A retail shop brings in HK$500,000 in sales over the year.
- Subtract the cost of goods sold. The shop spent HK$300,000 on inventory purchased for resale.
- The result is gross profit. HK$500,000 − HK$300,000 = HK$200,000 gross profit.
What is included in cost of goods sold (COGS)?
Cost of goods sold covers the direct costs of producing or buying what you sell. These include raw materials, direct labour and direct production overhead tied to making your products or delivering your services.
Indirect costs sit outside COGS. Rent, marketing, administrative salaries and office supplies are operating expenses, not cost of goods sold. If you need help separating these, see how to work out cost of goods sold.
Gross profit vs net profit
Gross profit and net profit measure different things. Gross profit is revenue minus cost of goods sold, while net profit is what remains after all other operating expenses and taxes.
Think of gross profit as your starting point for profitability. Net profit is the bottom line, the amount your business actually keeps after every cost has been paid.
Gross profit vs gross profit margin
Gross profit is a dollar figure, while gross profit margin expresses gross profit as a percentage of revenue. The margin formula is: gross profit ÷ revenue × 100.
Using the earlier example: HK$200,000 ÷ HK$500,000 × 100 = 40%. This percentage lets you compare profitability across periods or against other businesses, regardless of revenue size.
What is a good gross profit margin?
A good gross profit margin varies widely by industry. What counts as strong in retail may be low in software, and vice versa.
Across US-listed companies, the all-industries gross profit margin has stayed around 40% in recent years. Keep in mind these are figures from publicly traded firms in the United States. Hong Kong small-business margins may differ based on industry, scale and local operating conditions.
How to improve your gross profit
Raising your gross profit means earning more from each sale or spending less to produce it. Here are practical ways to do both.
- Raise prices where the market allows, testing small increases to gauge customer response.
- Reduce cost of goods sold by renegotiating with suppliers or sourcing more competitive quotes.
- Adjust your product or service mix toward higher-margin lines.
- Cut waste in production by improving processes or reducing spoilage.
For more ideas, see how to increase your profits.
Track your gross profit with Xero
Xero's reporting gives you a clear view of revenue, cost of goods sold and gross profit in one place. With up-to-date figures from automated bank feeds and invoicing, you can spot trends early and make informed decisions about pricing or costs. Ready to see your numbers more clearly? You can get one month free and start tracking your gross profit today.
FAQs on gross profit
Here are answers to common questions about gross profit.
Can gross profit be negative?
Yes. If your cost of goods sold exceeds your revenue, you have a negative gross profit. This signals you're spending more to produce or buy goods than you're earning from selling them.
Does gross profit apply to service businesses?
Yes. Service businesses calculate gross profit by subtracting direct service delivery costs, such as labour and materials, from service revenue.
Is gross profit the same as gross income?
Yes. Gross profit is the standard term for revenue minus cost of goods sold. Both refer to the same figure, though gross profit is more commonly used in accounting.
Do you pay tax on gross profit or net profit?
In Hong Kong, profits tax is charged on assessable profits after allowable deductions, not on gross profit. Your tax liability is based on the net figure, not the gross.
Related terms
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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.