How to calculate profit
Learn how to calculate gross, operating and net profit with simple formulas and worked examples.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Profit is what's left when you subtract your expenses from your revenue, and it comes in three levels: gross, operating and net.
- Gross profit is revenue minus cost of goods sold, operating profit takes off operating expenses, and net profit takes off interest and tax as well.
- Each profit figure tells you something different, so tracking all 3 gives you a clearer picture of how your business is really doing.
- You can lift profit by raising prices, selling more, or trimming your costs.
What is profit?
Profit is the money your business keeps after you subtract your expenses from your revenue. If revenue is higher than expenses, you've made a profit; if it's lower, you've made a loss.
Profit is measured at three levels, and each one strips out a different set of costs: gross profit, operating profit and net profit.
How to calculate profit: the profit formula
The master formula is simple: profit = revenue minus expenses. The three profit levels apply that formula in stages, taking off more costs at each step.
The progression runs like this: you start with revenue, subtract cost of goods sold to get gross profit, subtract operating expenses to get operating profit, then subtract interest and tax to get net profit. Working through the levels in order shows you exactly where your money goes.
How to calculate gross profit
Gross profit shows what's left from your sales once you've covered the direct cost of making or buying what you sell. The formula is gross profit = revenue minus cost of goods sold (COGS).
Say you run a café that brings in $200,000 in revenue over the year, and the coffee, milk and food you buy to sell costs you $70,000. Your gross profit is $200,000 minus $70,000, which is $130,000.
How to calculate operating profit
Operating profit shows what's left after you've also paid the day-to-day costs of running the business, such as rent, wages and power. The formula is operating profit = gross profit minus operating expenses.
Using the same café, your gross profit is $130,000 and your operating expenses (rent, staff, utilities) come to $90,000. Your operating profit is $130,000 minus $90,000, which is $40,000.
How to calculate net profit
Net profit is your true bottom line: what you keep once every cost is accounted for. The formula is net profit = operating profit minus interest and tax, which is the same as revenue minus all your expenses.
Carrying on with the café, your operating profit is $40,000 and you pay $5,000 in loan interest and $9,800 in tax. Your net profit is $40,000 minus $14,800, which is $25,200.
Gross vs operating vs net profit
All 3 figures use the same revenue but subtract different costs, so each one answers a different question about your business. Here's what each figure tells you:
- Gross profit: how efficiently you produce or buy what you sell, before running costs
- Operating profit: how well the core business performs once day-to-day running costs are in
- Net profit: what you actually keep after interest and tax, the figure that shows if the business is truly profitable
What is profit margin?
Profit margin is any of these profit figures shown as a percentage of revenue, rather than a dollar amount. Expressing profit as a percentage makes it easier to compare periods or benchmark against other businesses.
To work out the details for each type, see the profit margin glossary term.
How to increase your profit
Improving profit comes down to widening the gap between what you earn and what you spend. You've got 3 practical levers to pull:
- Raise your prices, so each sale brings in more revenue
- Grow your sales volume, so you sell more without adding much to your costs
- Reduce your costs, by cutting unnecessary spending or finding cheaper suppliers
See your profit clearly with Xero
When your invoices, bills and bank transactions sit in one place, your gross, operating and net profit update as you go, so you always know where you stand. You can try it and get one month free.
FAQs on calculating profit
Here are answers to some frequently asked questions about calculating profit.
How do I calculate net profit?
Take your operating profit and subtract interest and tax, or simply take your revenue and subtract every expense. The result is the money your business keeps.
What's the difference between gross and net profit?
Gross profit only takes off the direct cost of what you sell, while net profit takes off every cost including operating expenses, interest and tax. Net profit is always the smaller, more complete figure.
How do I calculate profit margin?
Divide your profit by your revenue, then multiply by 100 to get a percentage. You can do this for gross, operating or net profit.
What's a good profit margin?
It varies a lot by industry, so it's most useful to compare against businesses like yours and to track whether your own margin is improving. A margin that's steady or rising over time is a healthy sign.
How do I make my business more profitable?
Focus on raising prices, selling more, or cutting costs, and review the numbers regularly so you can act early. Small changes across all 3 levers can add up quickly.
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.