Gross profit
Learn what gross profit is, how to calculate it, and how it differs from net profit and margin.
Published Monday 31 August 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 what your business keeps from sales after paying the direct cost of the goods or services you sold
- The formula is gross profit = revenue − cost of goods sold (COGS)
- Gross profit covers only direct production costs, while net profit also deducts operating expenses, interest and tax
- Gross profit margin restates the figure as a percentage, which makes it easier to compare periods and industries
What is gross profit?
Gross profit is the money your business keeps from sales after covering the direct cost of producing your goods or services. It shows whether your core product or service makes money before you pay for rent, salaries, marketing and other running costs.
In other words, gross profit measures how well you turn sales into cash at the most basic level. If it's low, the problem usually sits in your pricing or your production costs, not in your overheads.
The gross profit formula
You work out gross profit with one calculation, using two figures from your accounts.
Gross profit = revenue − cost of goods sold (COGS)
Revenue is the total money from sales in a period. Cost of goods sold is the direct cost of making or buying the products you actually sold in that same period.
What's included in gross profit: revenue and COGS
Gross profit uses two inputs, so getting each one right matters. Revenue is your total net sales for the period, after discounts and returns.
Cost of goods sold, sometimes called cost of sales, covers the direct costs tied to producing what you sold, such as:
- direct materials, like raw ingredients or stock bought for resale
- direct labor, meaning wages for the people who make the product or deliver the service
- production overhead, such as factory power or equipment running costs
- inbound freight to get materials or stock to you
Gross profit leaves out costs that aren't tied directly to production, including:
- rent and utilities for your office or shopfront
- marketing and advertising
- administrative salaries, such as management or accounting pay
- interest on loans and income tax
How to calculate gross profit
Calculating gross profit takes three steps once your sales and costs are recorded for the same period.
- Add up your total revenue for the period you want to measure.
- Total your cost of goods sold, including direct materials, direct labor and production overhead.
- Subtract cost of goods sold from revenue. The result is your gross profit.
Say you run a small bakery in Cebu. Over one month you make ₱500,000 in sales. Your direct costs come to ₱300,000: ₱180,000 for ingredients, ₱90,000 for bakers' wages and ₱30,000 for oven power and other production overhead. Your gross profit is ₱500,000 − ₱300,000 = ₱200,000 for the month.
Gross profit vs gross profit margin
Gross profit is a peso amount, while gross profit margin shows that amount as a percentage of revenue. The margin is often the more useful number, because it lets you compare a small month with a big one on equal terms.
Gross profit margin = (gross profit ÷ revenue) × 100
Using the bakery example, ₱200,000 ÷ ₱500,000 × 100 gives a 40% gross profit margin. Watching how this percentage moves over time is a quick way to track your profit margin and check whether pricing and costs are heading the right way.
Gross profit vs net profit
Gross profit subtracts only the direct cost of what you sold. Net profit goes further and takes out all your other costs too, including operating expenses, interest and tax, to show what your business actually keeps.
Gross profit tells you whether your product or service is priced well. Net profit tells you whether the whole business is profitable. Both matter, because strong gross profit can still turn into a loss when operating costs run too high.
Why gross profit matters and where it appears
Gross profit shows how efficiently you turn sales into money before overheads. That makes it one of the first numbers to watch as you grow. On your income statement, also called the profit and loss statement, gross profit sits just below revenue and cost of goods sold, above your operating expenses.
Keeping an eye on gross profit helps you:
- set prices that cover production costs and leave room for profit
- decide which products or services are worth pushing
- catch rising supplier or material costs before they eat into earnings
- plan for growth with a clear view of your core profitability
What is a good gross profit?
There's no single "good" gross profit, because healthy margins depend heavily on your industry. A software business and a grocery store can both be doing well with very different numbers.
Margins-by-sector data compiled by NYU Stern finance professor Aswath Damodaran (January 2026) puts gross margins at about 33% in general retail and over 70% in software. Those figures cover US publicly listed companies, so small businesses in the Philippines often see different numbers.
A more practical benchmark is your own history. Compare your gross profit month to month: a rising margin usually points to better pricing or lower costs, while a falling one is worth investigating. For a fuller picture, pair it with other profitability ratios such as your net profit margin.
Common mistakes when calculating gross profit
Getting gross profit right depends on sorting your costs correctly. Watch out for these common slip-ups:
- putting operating costs like rent or marketing into cost of goods sold, which overstates your production costs
- mixing time periods, such as pairing this month's sales with last month's costs
- ignoring inventory changes, so unsold stock gets counted as a cost of sale
- relying on manual spreadsheets, where one wrong cell throws off the result
Track your gross profit with Xero
When your sales and costs live in one place, gross profit is far easier to see. Xero brings your invoices, bills and bank transactions together, then turns them into clear profit and loss reports. That way you always know how your business is tracking. New customers can get one month free when they choose a Xero plan.
FAQs on gross profit
Here are quick answers to some of the most common questions about gross profit.
How do you calculate gross profit?
Subtract cost of goods sold from revenue for the same period. You can do this for a single product or the whole business, as long as the sales and costs you compare cover the same items and timeframe.
What is the difference between gross profit and net profit?
Gross profit deducts only the direct cost of goods sold, while net profit also deducts operating expenses, interest and tax. A business can post healthy gross profit yet little net profit if its overheads are high.
What is the difference between gross profit and gross profit margin?
Gross profit is a peso amount, while gross profit margin expresses it as a percentage of revenue. Margin is handy for comparing periods or businesses of different sizes.
What costs are included in cost of goods sold (COGS)?
COGS covers direct production costs such as materials, direct labor, production overhead and inbound freight. It leaves out overheads like rent, marketing and administrative salaries.
What is a good gross profit for a small business?
There's no universal figure, since it varies by industry and business model. The most useful benchmark is your own past performance, tracked month to month.
Related terms
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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.