Gross profit
Learn what gross profit is, how to calculate it, and how it differs from gross margin and net profit.
Published Wednesday 30 September 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 your revenue minus the cost of goods sold, so it shows what you earn on sales before overheads
- You still pay rent, wages, interest and tax out of gross profit, so net profit is usually a smaller figure
- Gross profit margin turns the rupiah figure into a percentage, which makes it easy to compare periods and products
- Raising prices and cutting product costs both lift gross profit, as long as your sales volume holds up
What is gross profit?
Gross profit is the money you have left after paying for the things you sold to customers. It tells you how much you made on sales before any other business costs come out.
You don’t get to keep all of it, though. Think of gross profit as a pot of money that still has bills attached: operating expenses like rent, office supplies and loan repayments get paid from it, and so does tax. The bigger the pot, the easier those bills are to cover and the better your chance of ending up with net profit.
Gross profit appears near the top of your profit and loss statement, straight after revenue and cost of goods sold. If you’re building one yourself, a free profit and loss template sets out each line in the right order.
Gross profit formula
The gross profit formula is net sales minus cost of goods sold (COGS). Corporate Finance Institute defines it the same way, as revenue less the direct costs of producing what you sell.
Gross profit = net sales minus cost of goods sold
Net sales is your total sales once you take off customer refunds and discounts. Using net sales keeps the result honest, because money you’ve handed back to customers was never really earned.
What counts as cost of goods sold
COGS covers the direct costs of making or buying the products you sold in a period. If a cost goes up when you sell more units, it usually belongs in your cost of goods sold.
Costs you’d normally include are:
- raw materials and parts used to make products
- stock you bought to resell
- direct labour for staff who make or assemble goods
- freight and delivery costs to get stock into your business
- packaging that goes out with each product
Overheads stay out of COGS. Shop rent, marketing, admin wages and interest are operating or finance costs, so they come off later in your profit and loss statement.
A retailer can work out COGS for a period with a simple stock count: opening stock plus purchases, minus closing stock. Service businesses often call this line cost of sales and include direct costs such as subcontractor fees or materials used on a job.
How to calculate gross profit
You can calculate gross profit in four steps using figures from your sales records and stock or purchase records. Pick one period first, such as a month or a year, and use it for every number.
- Add up your total sales for the period.
- Subtract refunds and discounts to get net sales.
- Work out cost of goods sold for the same period.
- Subtract cost of goods sold from net sales to get gross profit.
Here’s how that looks for a small homewares shop in Bandung over one year. The shop takes Rp 520,000,000 in total sales and gives back Rp 20,000,000 in returns and discounts, leaving Rp 500,000,000 in net sales.
Its cost of goods sold for the year is Rp 300,000,000. So the shop’s gross profit is Rp 500,000,000 minus Rp 300,000,000, which equals Rp 200,000,000.
Gross profit vs gross profit margin
Gross profit is an amount in rupiah, while gross profit margin is that amount shown as a percentage of net sales. The percentage tells you how much of each Rp 1 of sales you keep after paying for the goods.
Gross profit margin = (gross profit ÷ net sales) × 100
For the Bandung shop, that’s (Rp 200,000,000 ÷ Rp 500,000,000) × 100 = 40%. In other words, the shop keeps Rp 40 of every Rp 100 it sells before overheads.
Margin is handy when your sales change a lot between periods. Your gross profit in rupiah might rise simply because you sold more, while a falling gross profit margin shows each sale is earning less.
Gross profit vs operating profit vs net profit
These three figures sit at different points on your profit and loss statement, and each one takes off another layer of costs. Revenue sits at the top and net profit is the final result.
- Revenue is your total income from sales before any costs
- Gross profit is net sales minus cost of goods sold
- Operating profit is gross profit minus operating expenses such as rent and wages
- Net profit is what’s left after all operating expenses, interest and tax
Say the Bandung shop spends Rp 120,000,000 on rent and staff wages during the year. Its operating profit is Rp 200,000,000 minus Rp 120,000,000, which equals Rp 80,000,000. Net profit is whatever remains after interest on its loan and income tax.
Each figure answers a different question. Gross profit shows whether your products earn enough, while net profit shows what you actually end up with once every cost is paid.
Why gross profit matters for your business
Gross profit shows whether your core trading makes money before overheads get involved. It’s one of the simplest ways to measure profitability, and it guides everyday decisions. Tracking it helps you:
- set prices that cover what your goods cost, with room left for overheads
- see which products or services earn the most on each sale
- spot rising supplier costs or heavy discounting early by comparing months
- find your break-even point, where gross profit covers all operating expenses
The break-even point makes this figure especially useful for planning. The Bandung shop needs at least Rp 120,000,000 of gross profit to cover its overheads, so its Rp 200,000,000 gives it room to spare. Your margin of safety shows how far sales could fall before you’d reach that point.
Ways to improve gross profit
You improve gross profit by earning more from each sale, paying less for what you sell, or both. Small changes to price and product costs add up quickly because they affect every unit you sell.
Practical options include:
- reviewing prices regularly, especially after supplier costs rise
- negotiating better rates or bulk discounts with suppliers
- cutting waste, breakage and stock losses
- promoting products with higher margins
- limiting discounts and reducing returns with clear product information
Keep an eye on sales volume when you change prices, as a higher price only helps if customers keep buying. For ideas beyond gross profit, see these ways to increase profits across your business.
Track your gross profit with Xero
Knowing your gross profit helps you price with confidence and plan for the costs ahead. Xero’s financial reporting tools calculate gross profit for you in your profit and loss report, so you can check it any time without a spreadsheet.
Connect your bank feeds, keep sales and costs up to date automatically, and get one month free when you sign up to Xero.
FAQs on gross profit
Here are quick answers to common questions about gross profit.
Is gross profit the same as revenue?
Revenue is the total you earn from sales, and gross profit is what’s left once you subtract the cost of those goods. Two businesses with the same revenue can have very different gross profit.
Can gross profit be negative?
Yes, if your cost of goods sold is higher than your net sales, you’ll have a gross loss. It usually points to prices set below cost or heavy discounting, so it’s worth reviewing quickly.
Is gross profit calculated before tax?
Yes, gross profit is worked out before operating expenses, interest and income tax. Tax comes off at the bottom of the profit and loss statement when you calculate net profit.
Do service businesses have gross profit?
Yes, service businesses subtract direct costs such as subcontractor fees or job materials from their sales. If you have no direct costs at all, your gross profit equals your net sales.
What is a good gross profit?
A good gross profit comfortably covers your operating expenses and leaves room for net profit. Compare your margin with your own past results and with businesses in your industry, as healthy margins vary widely between sectors.
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.