Gross profit
Learn what gross profit is, how to calculate it, and how it differs from net profit and gross 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 the direct cost of the goods or services you sold
- It shows how much money your sales generate before rent, marketing, admin wages, interest and tax
- Net profit is what remains after you pay all those other costs out of gross profit
- Gross profit margin turns gross profit into a percentage, so you can compare periods and products fairly
What is gross profit?
Gross profit is the money left from your sales after you pay the direct costs of producing or buying what you sold. It appears near the top of your profit and loss statement, just below revenue and cost of goods sold.
Think of gross profit as the pot that funds the rest of your business. Rent, utilities, loan repayments and tax all come out of it, and whatever remains after those is the profit you keep. You can see where each figure sits using a profit and loss template.
Gross profit formula
The gross profit formula uses two figures you’ll find on your profit and loss statement. Here it is in text form:
Gross profit = Revenue − Cost of goods sold
Revenue here means net sales, and cost of goods sold (COGS) covers only the direct costs tied to those sales. The Corporate Finance Institute defines gross profit the same way, as sales less the cost of producing them.
How to calculate gross profit
You can work out gross profit for any period in four steps. Use figures from the same month, quarter or year so the result is accurate.
- Choose the period you want to measure, such as last month.
- Add up your total sales for that period.
- Subtract returns, refunds and discounts to get net sales.
- Subtract your COGS for the same period from net sales.
Say you run a café in Kuala Lumpur. In one month, you ring up RM52,000 in sales and give RM2,000 in refunds and discounts, so net sales are RM50,000.
Your direct costs that month are RM14,500 for coffee beans, milk and food ingredients. You also spend RM2,700 on takeaway cups and packaging, plus RM800 on supplier delivery charges. That brings COGS to RM18,000. Your gross profit is RM50,000 − RM18,000 = RM32,000.
What to include in revenue and COGS
Your result is only as reliable as the numbers you feed into the formula. Start with revenue, which should reflect what customers actually paid for your goods or services.
Use net sales: your total sales of products or services minus customer returns, refunds and discounts. Leave out any tax you collect on sales.
COGS covers the costs that rise and fall with each sale. For a business that holds stock, the usual items are:
- Stock purchased for resale
- Raw materials used to make products
- Direct labour for staff who make the product
- Inbound freight to get stock to your premises
Leave out costs that stay roughly the same whatever you sell, such as rent, marketing, admin salaries and utilities. These are operating expenses, and they belong further down your profit and loss statement.
Gross profit for product and service businesses
Gross profit works for every type of business, but the direct costs look different. A retailer or manufacturer counts stock and materials, while a service business mostly counts people’s time.
Service businesses often call their direct costs cost of sales, since there are no physical goods. This usually includes wages for staff delivering client work, subcontractor fees and materials used on a job. See how to handle cost of sales if your business sells time or expertise.
Hybrid businesses, like a salon that sells hair products and haircuts, can track both. Splitting direct costs by product and service shows which side of the business earns more from each ringgit of sales.
Gross profit vs net profit
Gross profit and net profit sit at different points on your profit and loss statement. Gross profit comes first, and net profit is the final line.
- Gross profit is revenue minus COGS
- Net profit is gross profit minus all other operating expenses, interest and taxes
For the café, the RM32,000 gross profit still has to pay rent, front-of-house wages, utilities, loan interest and tax. The amount left after all of those is net profit, the figure you can reinvest or take out of the business.
Gross profit vs gross profit margin
Gross profit is an amount in ringgit, while gross profit margin shows that amount as a percentage of revenue. The margin makes it easier to compare months, products or businesses of different sizes.
Gross profit margin = (Gross profit ÷ Revenue) × 100
For the café, RM32,000 ÷ RM50,000 × 100 gives a gross profit margin of 64%. In other words, the café keeps RM0.64 from every ringgit of sales to cover its other costs. A margin calculator can do the maths for you.
Why gross profit matters for your business
Gross profit tells you whether your core trading makes money before overheads enter the picture. A higher gross profit gives you more room to cover operating expenses and reach a healthy net profit.
Tracking gross profit regularly helps you:
- Check whether your prices cover your direct costs
- Spot rising supplier costs early
- Compare which products or services earn the most
- Decide where to focus sales and marketing effort
Gross profit also feeds into other profitability ratios, such as net profit margin. Reading them together gives you a fuller picture of how your business performs.
Common gross profit mistakes
Small errors in your inputs can make gross profit look better or worse than it is. Watch for these as you calculate it:
- Using total sales instead of net sales after returns and discounts
- Putting rent, marketing or admin wages into COGS
- Forgetting inbound freight or packaging costs
- Matching sales from one period with costs from another
- Counting stock you bought but haven’t sold yet as COGS
Keeping your books up to date and your costs coded consistently avoids most of these slips. It also means you can trust the number when you make pricing decisions.
Track your gross profit with Xero
Knowing your gross profit helps you price with confidence and keep costs in check. Xero pulls your sales and direct costs into clear financial reports, so your gross profit is always up to date.
See how easy it is to stay on top of your numbers when you get one month free.
FAQs on gross profit
These answers cover common questions small business owners ask about gross profit.
Is gross profit before or after expenses?
Gross profit is after direct costs but before operating expenses, interest and tax. That’s why it’s sometimes described as profit at the trading level.
Can gross profit be negative?
Yes, gross profit is negative when your COGS is higher than your revenue, meaning you’re selling below cost. It’s a signal to review your pricing or supplier costs quickly.
How do discounts and returns affect gross profit?
Discounts and returns reduce net sales, so they lower gross profit even when your direct costs stay the same. If you can restock and resell returned goods, their cost usually comes back out of COGS.
Is gross profit the same as gross margin?
They’re closely linked, and people often use the terms loosely. Gross profit is a ringgit amount, while gross margin usually refers to gross profit as a percentage of revenue.
Does gross profit include sales and service tax (SST)?
Gross profit is normally calculated on revenue excluding SST, a tax you charge customers and pass to Royal Malaysian Customs. Accounting standards treat amounts collected on behalf of third parties as outside revenue, so check with your accountant how this applies to your sales.
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.