Gross profit
Learn what gross profit is, how to calculate it and how it differs from net profit and margin.
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 your cost of sales. It's the money left after paying for the goods or services you sold.
- Cost of sales covers direct costs like stock, materials and direct labour. Overheads such as rent and marketing come out further down your accounts.
- Net profit is what remains after every other expense, including interest and tax. Gross profit margin shows gross profit as a percentage of revenue.
- Gross profit sits near the top of your profit and loss statement. Checking it regularly lets you adjust prices and supplier deals early.
What is gross profit?
Gross profit is the money you have left after paying for what you sold. You work it out by taking your cost of goods sold, also called cost of sales, away from your revenue.
This matches the definition set out by the Corporate Finance Institute. Picture a Cork bike shop that buys a bike from a wholesaler for €500 and sells it for €800. The €300 difference is the gross profit on that sale.
Gross profit pays for operating expenses and other costs, such as rent, office supplies, insurance and loan repayments. The more you have, the better your chance of ending the year with net profit. You'll find gross profit near the top of your profit and loss statement, just below revenue and cost of sales.
Gross profit formula
The formula is gross profit = revenue minus cost of sales. Revenue is your total sales for the period, less any refunds, returns and discounts you've given.
Your cost of goods sold is the direct cost of making or buying what you sold. A cost belongs here if it rises and falls with the number of items you sell. Costs that usually count as cost of sales include:
- stock or raw materials you buy to resell or make products
- direct labour, such as wages for staff who make the product
- inbound freight and delivery charges on the stock you buy
- packaging that goes out to the customer with the product
Costs you'd pay whether you sold one item or 1,000 sit lower on your profit and loss. These are operating expenses and other charges, which come out after gross profit:
- rent and utilities
- marketing and advertising
- administrative and office wages
- interest on loans
- corporation tax or income tax
Interest and tax are usually the last costs to come off, and what remains after them is your net income, or net profit.
How to calculate gross profit
You can work out gross profit in four steps using your sales records and supplier bills. A profit and loss template helps if you're pulling the figures together by hand.
1. Pick a time period
Choose the period you want to measure, such as a month, a quarter or a full year. Use the same period for revenue and costs so the two figures match up.
2. Add up your revenue
Total your sales for the period, then take away refunds, returns and discounts. The result is your net sales, which is the revenue figure the formula uses.
3. Work out your cost of sales
Add up the direct costs of the goods or services you sold in that period. If you hold stock, a common method is opening stock plus purchases minus closing stock.
4. Subtract cost of sales from revenue
Take your cost of sales away from your revenue. What's left is your gross profit, shown as a euro amount.
Example: gross profit for a Galway café
A Galway café takes €120,000 in sales over a year, after refunds. Its cost of sales is €45,000, covering coffee beans, milk, baked goods and takeaway cups.
Gross profit is €120,000 minus €45,000, which gives €75,000. Divide €75,000 by €120,000 and multiply by 100, and the café's gross profit margin is 62.5%.
That €75,000 now has to cover the café's rent, energy bills, insurance and loan repayments. Whatever is left after those costs, interest and tax is the owner's net profit.
Why gross profit matters
Gross profit tells you whether your prices cover the direct cost of what you sell. It also shows how much you have left over to run the rest of the business.
Say your sales grew 20% last year while gross profit stayed flat. That points to rising supplier costs or heavier discounting shrinking what you keep from each sale.
Net profit can blur that picture, because a cut in rent or insurance can hide weaker trading. Gross profit strips out overheads, so it's a useful figure to bring to your accountant or to a loan application.
Gross profit vs net profit
Gross profit takes away the direct cost of what you sold. Net profit goes further: it's gross profit minus all other expenses, including overheads, depreciation, interest and tax.
Net profit is the money your business keeps, which is why people call it the bottom line. Back at the Galway café, suppose rent, wages, energy, insurance, interest and tax come to €60,000. Its net profit would be €75,000 minus €60,000, or €15,000.
A business can have strong gross profit and thin net profit if its overheads are high. Looking at both lines tells you whether to work on pricing and supplier costs, or on running costs.
Gross profit vs gross profit margin
Gross profit is a euro amount, while gross profit margin is that amount as a percentage of revenue. The margin formula is gross profit ÷ revenue × 100.
The percentage makes it easier to compare periods, or businesses of different sizes. A shop with €30,000 gross profit on €60,000 sales has a 50% margin, the same as a shop making €300,000 on €600,000.
You can read more about gross profit margin and what it tells you. To check your own numbers quickly, try the Xero margin calculator.
What affects gross profit
Gross profit moves whenever your selling prices or direct costs change. Keep an eye on these factors:
- Supplier prices for stock and materials
- Your own selling prices
- Product mix, since some items carry higher margins than others
- Waste, spoilage and stock loss
- Discounts, refunds and returns
Small changes to any of these can help you increase your profits on the sales you already make. For example, a café that trims milk waste by a few litres a week lifts gross profit with no extra customers.
A healthy gross margin also depends on your sector. NYU Stern margin data from January 2026 puts average gross margin at about 26% for grocery and food retail. System and application software averages about 72%, and the total market about 38%.
These figures are averages for US publicly traded companies, so margins for Irish small businesses may differ.
Track your gross profit with Xero
Knowing your gross profit helps you set prices with confidence and plan for your overheads. Xero's financial reports show gross profit on your profit and loss in real time, so you always know where you stand.
Bank feeds bring your sales and supplier costs in automatically, which saves you hours of manual data entry. Sign up today to get one month free and see your gross profit update as you trade.
FAQs on gross profit
Here are quick answers to common questions about gross profit.
Can gross profit be negative?
Yes, gross profit is negative when your cost of sales is higher than your revenue. It means you're selling below cost, so it's worth reviewing your prices or supplier terms quickly.
Do service businesses have gross profit?
Yes. For a service business, cost of sales is the direct cost of delivering the work, such as subcontractor fees or billable staff wages.
Is gross profit what you pay tax on?
No. In Ireland, tax is charged on your taxable profit, which you work out after deducting allowable business expenses.
Should gross profit include VAT?
If you're registered for value-added tax (VAT), record your sales and cost of sales excluding VAT. The VAT you collect and reclaim passes through to the Revenue Commissioners, so it stays out of your gross profit.
How often should you check gross profit?
Monthly suits most small businesses. Check weekly if your supplier prices change often or your margins are tight.
Related terms
Learn more about gross 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.