How to calculate gross profit
Learn how to calculate gross profit with the formula, a worked NZ example, and margin and net profit comparisons.
Published Thursday 23 July 2026
Table of contents
How to calculate gross profit
Key takeaways
- Gross profit is what's left from your revenue once you subtract the cost of goods sold, so it shows how much you make before other expenses.
- The gross profit formula is revenue minus cost of goods sold (COGS), and you can pull both figures from your profit and loss statement.
- Gross profit is a dollar amount, while gross profit margin turns that figure into a percentage of your revenue.
- Gross profit and net profit are different: net profit is what remains after you also subtract all other operating expenses and taxes.
What is gross profit?
Gross profit is the money your business keeps from sales after you subtract the direct costs of producing your goods or services. It gives you a quick read on how profitable your core trading is before you account for other expenses.
The formula is simple: gross profit = revenue minus cost of goods sold (COGS). A healthy gross profit means you're pricing and producing in a way that leaves room to cover everything else.
How to calculate gross profit
You can work out gross profit in 3 steps, and you'll find both figures you need on your profit and loss statement. Follow these steps in order.
- Work out your revenue: add up all the sales income your business earned over the period, before any costs are taken out.
- Work out your cost of goods sold: total the direct costs of making or buying the products and services you sold in that same period.
- Subtract COGS from revenue: the result is your gross profit for the period.
If you'd rather start from a blank layout, you can map out these figures using a profit and loss sheet template.
Gross profit calculation example
A worked example makes the formula easier to picture. Say your business earns revenue over a quarter and has some direct costs to cover.
Your revenue is $20,000 and your cost of goods sold is $8,000. Subtract $8,000 from $20,000 and your gross profit is $12,000 for that period.
What is included in cost of goods sold?
Cost of goods sold covers the direct costs tied to producing what you sell. Getting this right keeps your gross profit accurate, so here's what typically counts.
- Direct materials: the raw materials and components that go into your products
- Direct labour: wages for the people who make your products or deliver your services
- Freight and shipping: the cost of getting stock or materials to you
- Production supplies: items consumed directly in making your goods
COGS leaves out your indirect costs, so overheads like rent, office supplies, and loan repayments sit outside it and get subtracted later when you work out net profit.
Gross profit vs gross profit margin
Gross profit and gross profit margin measure the same thing in different ways. Gross profit is a dollar amount, while gross profit margin expresses that amount as a percentage of your revenue.
To find the margin, divide your gross profit by your revenue, then multiply by 100. The percentage makes it easier to compare performance across periods or against other businesses, and you can read more in this guide to gross profit margin.
Gross profit vs net profit
Gross profit and net profit both measure profitability, but they sit at different points on your profit and loss statement. Each one tells you something distinct about your business.
Gross profit is revenue minus cost of goods sold. Net profit goes further: it's your gross profit minus all your other operating expenses and taxes, so it shows what your business truly keeps. To dig deeper, see the difference between gross profit and net profit or learn how to calculate net profit.
What is a good gross profit margin?
There's no single figure that counts as a good gross profit margin, because it varies a lot by industry. A service business and a retailer can both be healthy with very different margins.
Rather than chasing a universal number, compare your margin against your own past performance and against other businesses in your industry. A margin that's steady or rising over time is usually a good sign for your business.
Common gross profit calculation mistakes
Small errors in your figures can distort your gross profit and lead to shaky decisions. Watch out for these common mistakes.
- Mixing overhead costs into COGS: keep rent, admin, and other overheads out of your direct costs
- Forgetting to subtract returns and discounts from revenue: use your actual net sales, not gross sales
- Mismatching the period of revenue and costs: match the costs to the same period as the revenue they helped earn
Track your gross profit with Xero
Keeping an eye on gross profit is easier when your numbers live in one place. Xero brings your sales and costs together, so you can see how your business is tracking.
Xero helps you keep track of your revenue and costs with real-time profit and loss reporting, so working out your gross profit takes less digging. Get one month free.
FAQs on gross profit
Here are answers to some frequently asked questions about gross profit to clear up the finer points.
What is the gross profit formula?
The gross profit formula is revenue minus cost of goods sold. It measures what you keep from sales before other expenses come out.
What is the difference between gross profit and gross profit margin?
Gross profit is a dollar figure, and gross profit margin is that figure shown as a percentage of revenue. The margin makes it easier to benchmark performance over time.
Does gross profit include tax?
No, gross profit is worked out before tax and before most other expenses. Tax is subtracted later when you calculate net profit.
What is the difference between margin and markup?
Margin is your gross profit as a percentage of revenue, while markup is the amount you add to cost as a percentage of that cost. They use the same figures but different bases, so they give different percentages.
Related terms
Learn more about gross profit
Handy resources
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Profit & Loss template
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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.