How to calculate profit
Learn how to calculate profit using simple formulas, with a worked example for your small business.
Published Monday 17 August 2026
Table of contents
Key takeaways
- Profit is what your business keeps after subtracting all expenses from revenue; a positive figure is a profit and a negative one is a loss.
- There are three main types: gross profit (revenue minus COGS), operating profit (gross profit minus operating expenses), and net profit (after interest and tax).
- Calculate profit by starting with revenue and subtracting each layer of costs in order until you reach net profit.
- Profit is a dollar amount, while profit margin expresses that profit as a percentage of revenue.
What is profit?
Profit is the money your business keeps after subtracting all expenses from your revenue. When your revenue exceeds your expenses, you have a profit; when expenses exceed revenue, you have a loss.
Profit differs from revenue in an important way. Revenue is the total amount of money your business earns from sales before any deductions. Profit is what remains after you account for all costs involved in running your business.
Types of profit
Understanding the different types of profit helps you see where your money goes at each stage of your business operations. Each type reveals something different about your financial health.
Gross profit
Gross profit is your revenue minus the cost of goods sold (COGS). COGS includes the direct costs of producing or purchasing the products you sell, such as raw materials, manufacturing costs, or wholesale purchase prices. This figure shows how much you earn from your core business activities before accounting for other expenses.
Operating profit
Operating profit is your gross profit minus operating expenses. Operating expenses include rent, utilities, salaries, marketing, and other day-to-day costs of running your business. This figure shows how well your business performs from its regular operations.
Net profit
Net profit is your operating profit minus interest and tax. This is the money your business actually keeps after all obligations are paid. Net profit is often called the “bottom line” because it represents your true earnings.
Profit formulas
These formulas help you calculate profit at each level of your business.
- Profit = revenue − costs
- Gross profit = revenue − cost of goods sold (COGS)
- Operating profit = gross profit − operating expenses
- Net profit = operating profit − interest and tax
How to calculate profit step by step
Follow these steps to calculate your profit from start to finish.
- Add up all your revenue from sales during the period.
- Subtract your cost of goods sold (COGS) from your revenue to get your gross profit.
- Subtract your operating expenses from your gross profit to get your operating profit.
- Subtract interest and tax from your operating profit to get your net profit.
Example of calculating profit
Here is how a small sari-sari store in the Philippines might calculate its monthly profit.
The store earns $150,000 in revenue from sales. The cost of goods sold (purchasing inventory from suppliers) is $90,000. Gross profit is $150,000 − $90,000 = $60,000.
Operating expenses (rent, electricity, employee wages) total $25,000. Operating profit is $60,000 − $25,000 = $35,000.
Interest on a small business loan is $2,000, and estimated tax is $3,000. Net profit is $35,000 − $2,000 − $3,000 = $30,000. This $30,000 is the money the store keeps after all expenses.
Profit vs profit margin
Profit is a dollar amount, while profit margin is a percentage. Profit tells you how much money you made; profit margin tells you how efficiently you made it relative to your revenue.
The profit margin formula is: profit ÷ revenue × 100. For example, if your net profit is $30,000 and your revenue is $150,000, your net profit margin is 20%.
A “good” profit margin varies by industry, business model, and stage of growth. Some industries operate on thin margins, while others expect higher returns. Compare your margin to businesses similar to yours for a meaningful benchmark. You can also learn how to calculate gross profit margin separately from net profit margin.
Ways to improve your profit
Growing your profit comes down to earning more or spending less. Here are practical ways to do both.
- Increase your revenue by raising prices, finding new customers, or selling more to existing customers.
- Reduce your cost of goods sold by negotiating better prices with suppliers or finding more cost-effective materials.
- Cut operating costs by reducing overhead, renegotiating rent, or finding more efficient processes.
- Review your expenses regularly to identify unnecessary spending.
For more strategies, explore ways to increase profits in your business.
Common mistakes when calculating profit
Avoiding these errors helps ensure your profit calculations are accurate.
- Confusing revenue with profit, and thinking all incoming money is yours to keep.
- Omitting expenses such as loan interest, depreciation, or occasional costs.
- Mixing up profit (a dollar amount) with profit margin (a percentage).
- Forgetting to account for tax obligations before calculating net profit.
- Using inconsistent time periods when comparing revenue and expenses.
Track your profit with Xero
Knowing your profit is only useful if you can track it consistently. Xero's reporting tools let you monitor gross, operating, and net profit in real time, so you always know where your business stands. You can measure profitability with dashboards that update as transactions flow in.
With automated bank feeds and expense tracking, Xero reduces manual data entry and helps you keep accurate records. Ready to see your profit clearly? Start your subscription and get one month free.
FAQs on calculating profit
Here are answers to common questions about calculating profit.
What is the formula to calculate profit?
The basic formula is profit = revenue − costs. For more detail, use gross profit = revenue − COGS, operating profit = gross profit − operating expenses, and net profit = operating profit − interest and tax.
What is the difference between gross, operating and net profit?
Gross profit is revenue minus cost of goods sold. Operating profit is gross profit minus operating expenses, and net profit is operating profit minus interest and tax, representing the money your business actually keeps.
What is the difference between profit and profit margin?
Profit is a dollar amount showing how much money you made. Profit margin is a percentage showing how much of each dollar of revenue you kept as profit.
What is the difference between profit and revenue?
Revenue is the total money your business earns from sales. Profit is what remains after you subtract all expenses from that revenue.
Related terms
Learn more about calculating profit
Handy resources
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Profit & Loss template
Download Xero’s profit and loss statement template to show how much money you business is making
Financial reporting
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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.