How to calculate profit
Learn how to calculate gross, operating and net profit, using clear formulas and a worked example.
Published Monday 17 August 2026
Table of contents
Key takeaways
- Profit is what remains after subtracting expenses from revenue, and understanding the difference between gross, operating and net profit helps you see where your money goes.
- Calculating profit regularly lets you set better prices, control costs, plan for tax and show lenders or investors that your business is financially healthy.
- The core formulas are straightforward: gross profit = revenue minus cost of goods sold; operating profit = gross profit minus operating expenses; net profit = operating profit minus interest and tax.
- Tracking profit margin as a percentage of revenue makes it easier to compare performance over time and against other businesses in your sector.
What is profit?
Profit is the money left over when you subtract your total expenses from your total revenue. It tells you whether your business is earning more than it spends. Most businesses track profit at three levels: gross profit, operating profit and net profit.
Why calculating profit matters for your business
Knowing your profit helps you make informed decisions about pricing, hiring and expansion. It shows whether your current prices cover your costs or need adjusting.
Profit figures also play a role at tax time, since your taxable income is based on what you earn after allowable deductions. If you ever apply for a loan or seek investment, lenders and investors will want to see that your business generates consistent profit.
The types of profit
Each profit level strips away a different layer of costs, giving you a clearer view of where your money goes.
Gross profit
Gross profit is your revenue minus the cost of goods sold (COGS). It shows how much you keep after covering the direct costs of producing or buying what you sell. A healthy gross profit means your core product or service is priced above its direct costs. The Corporate Finance Institute defines gross profit the same way.
Operating profit
Operating profit (also called EBIT, or earnings before interest and tax) is gross profit minus your operating expenses, such as rent, wages and utilities. It reflects how efficiently you run the day-to-day business before financing costs and tax come into play.
Net profit
Net profit is what remains after subtracting interest and tax from operating profit. Often called the bottom line, it represents the true earnings available to reinvest or withdraw from the business. As the Corporate Finance Institute explains, net profit (net income) is what remains after all expenses, including interest and taxes.
The profit formulas
Each formula builds on the one before it, starting with revenue and ending with net profit.
Revenue: your starting point
Revenue (sometimes called turnover or sales) is the total amount your business earns from selling goods or services before any costs are deducted. Everything else is subtracted from this figure.
Gross profit = revenue − cost of goods sold
Subtract the direct costs of producing or purchasing your goods from your revenue. The result is your gross profit.
Operating profit = gross profit − operating expenses
Take your gross profit and subtract running costs such as rent, wages, insurance and utilities. The result is your operating profit.
Net profit = operating profit − interest and tax
Subtract any interest payments on loans, plus your tax liability, from operating profit. The figure you arrive at is your net profit.
Understanding your costs
Costs fall into two broad categories: direct costs (cost of goods sold) and operating expenses. Direct costs are tied to producing or buying what you sell, while operating expenses cover everything else needed to keep the business running.
You can also think of costs as fixed or variable. Fixed costs stay roughly the same regardless of sales volume. Variable costs rise or fall with your level of activity.
- Direct costs (COGS): raw materials, ingredients, packaging, manufacturing labour
- Operating expenses: rent, salaries, utilities, insurance, marketing
- Fixed costs: rent, insurance premiums, loan repayments
- Variable costs: raw materials, shipping, sales commissions
How to calculate profit, step by step
Follow these four steps to work out each profit level for a given period.
- Find your total revenue for the period by adding up all sales of goods or services.
- Subtract your cost of goods sold from revenue to get your gross profit.
- Subtract your operating expenses from gross profit to get your operating profit.
- Subtract interest and tax from operating profit to arrive at your net profit.
Worked example: a Dublin café
Aoife runs a café in Dublin. Here's how her profit breaks down for the year.
Her total revenue is €200,000. The cost of goods sold (ingredients, packaging and other direct costs) comes to €80,000. Operating expenses (rent, wages and utilities) total €70,000. Interest and tax amount to €10,000.
Gross profit = €200,000 − €80,000 = €120,000. This gives a gross profit margin of 60%.
Operating profit = €120,000 − €70,000 = €50,000. The operating profit margin is 25%.
Net profit = €50,000 − €10,000 = €40,000. Aoife's net profit margin is 20%.
Profit vs profit margin
Profit is expressed as a euro amount, while profit margin is expressed as a percentage of revenue. Margin makes it easier to compare performance across time periods or against other businesses, regardless of size.
The formulas are:
- Gross profit margin = (gross profit ÷ revenue) × 100
- Net profit margin = (net profit ÷ revenue) × 100
Using Aoife's café as an example: gross profit margin = (€120,000 ÷ €200,000) × 100 = 60%. Net profit margin = (€40,000 ÷ €200,000) × 100 = 20%.
Profit vs revenue vs profitability
Revenue is the total money coming in before any costs are deducted. Profit is what remains after subtracting expenses. Profitability describes how well a business converts revenue into profit over time, often measured through margins or return on investment.
A business can have high revenue but low profit if its costs are too high. Tracking all three gives you a fuller picture of financial health.
Tips to improve your profit
Boosting profit comes down to increasing what you earn or reducing what you spend.
- Attract more customers through marketing or referrals
- Increase sales volume by upselling or bundling products
- Review your pricing to ensure it reflects the value you deliver
- Negotiate better terms with suppliers
- Cut unnecessary overheads and review subscriptions regularly
Track your profit with Xero
Xero's real-time reporting gives you an up-to-date view of your gross, operating and net profit whenever you need it. You can monitor margins, spot trends and make confident decisions without waiting for month-end figures. Get started today and get one month free.
FAQs on calculating profit
Below are answers to common questions about profit calculations.
What is the formula to calculate profit?
The basic formula is profit = revenue − expenses. For more detail, calculate gross profit (revenue − cost of goods sold), then operating profit (gross profit − operating expenses), then net profit (operating profit − interest and tax).
What is the difference between gross, operating and net profit?
Gross profit accounts only for direct costs. Operating profit also subtracts day-to-day running expenses. Net profit is what remains after interest and tax, representing your true bottom line.
What is a good profit margin?
A good margin depends on your industry and business model. Compare your figures to similar businesses in your sector and track them over time to see whether you're improving.
What is the difference between profit and cash flow?
Profit measures income minus expenses over a period, while cash flow tracks the actual movement of money in and out of your accounts. A profitable business can still run short of cash if payments are delayed.
How often should I calculate profit?
Monthly reviews help you spot issues early. Many businesses also prepare quarterly and annual profit figures for tax, reporting or planning purposes.
Is profit calculated before or after tax?
Operating profit (EBIT) is calculated before tax. Net profit is calculated after tax has been deducted.
Related terms
Learn more about calculating profit
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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.