Gross profit
Learn what gross profit means, 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 the money left from sales after you pay the direct cost of what you sold. It sits near the top of your profit and loss statement.
- The formula is gross profit = revenue − cost of goods sold. A shop with S$50,000 in sales and S$30,000 in direct costs has S$20,000 gross profit.
- Gross profit still has to cover rent, wages, interest and tax, which is why it’s usually higher than net profit.
- Gross profit margin turns the dollar figure into a percentage, making it easier to compare different months or similar businesses.
What is gross profit?
Gross profit is the money you have left after paying for the things you sold to customers. It shows how much your sales earn before any overheads come out.
You don’t get to keep gross profit, though. It’s the pot you pay operating expenses and taxes from, and whatever remains after that is your net profit.
Think of a café owner in Tiong Bahru. The coffee beans and milk used in each drink are direct costs, while the shop rent is paid from gross profit. You’ll find gross profit on your profit and loss statement, just below revenue and cost of sales.
Gross profit formula
The gross profit formula takes one figure away from another. Here it is in plain text:
Gross profit = Revenue − Cost of goods sold
This matches the standard definition from the Corporate Finance Institute, which describes gross profit as revenue minus cost of goods sold, reported on the income statement. The income statement is another name for the profit and loss statement.
How to calculate gross profit
You can calculate gross profit in four steps using figures from your sales records and inventory counts. Work to the same period throughout, such as one month or one financial year.
- Choose the period you want to measure
- Add up your revenue from sales for that period
- Work out your cost of goods sold for the same period
- Subtract cost of goods sold from revenue
Here’s how that looks for a small homeware shop in Singapore over one year. The shop earned S$50,000 in sales, and its direct costs came to S$30,000.
Gross profit = S$50,000 − S$30,000 = S$20,000
That S$20,000 is what the shop has to cover rent, staff wages, utilities and every other overhead.
What’s included in cost of goods sold
Cost of goods sold (COGS) covers the costs tied directly to making or buying what you sell. If a cost rises and falls with your sales volume, it usually belongs in COGS.
These costs are typically included in COGS:
- Stock bought for resale
- Raw materials and parts used in production
- Direct labour for staff who make the product
- Freight and shipping to bring stock in
These costs usually sit outside COGS as operating expenses:
- Office or shop rent
- Marketing and advertising
- Admin and management salaries
- Software subscriptions and utilities
If you resell stock, you can work out cost of goods sold with this formula: opening inventory + purchases − closing inventory. The homeware shop started with S$8,000 of stock, bought S$32,000 more and finished with S$10,000, giving COGS of S$30,000.
Service businesses can have direct costs too. A design studio might count freelance designer fees or printing materials used on client work, so its gross profit shows what each project really earns.
Gross profit vs net profit
Gross profit measures what’s left after direct costs, while net profit measures what’s left after every cost. Net profit is the true bottom line of your business.
Net profit = Gross profit − Operating expenses − Interest − Tax
Back to the homeware shop. It has S$20,000 gross profit, pays S$12,000 in operating expenses, S$1,000 in loan interest and S$1,000 in tax, leaving S$6,000 net profit.
Each figure answers a different question. Gross profit shows whether your products earn enough, and net profit shows whether the whole business does.
Gross profit vs gross profit margin
Gross profit is a dollar amount, and gross profit margin is that amount as a percentage of revenue. The percentage makes it easier to compare periods or businesses of different sizes.
Gross profit margin = (Gross profit ÷ Revenue) × 100
For the homeware shop, that’s (S$20,000 ÷ S$50,000) × 100 = 40%. So 40 cents of every dollar in sales is available for overheads and profit. A business earning the same S$20,000 on S$100,000 in sales has a 20% gross profit margin, which leaves far less room to cover costs.
What gross profit tells you about your business
Gross profit tells you how much money you made on sales. The higher it is, the more you have for operating expenses like rent and loan repayments, and the better your chance of a net profit.
Tracking it month by month shows you trends that one figure alone can hide. Watch for these signs that your direct costs or pricing need attention:
- Revenue grows but gross profit stays flat
- Gross profit margin slips over several months
- Supplier price rises aren’t reflected in your prices
- One product line earns much less than the rest
Gross profit is one of several ways to measure profitability. Pair it with net profit and cash flow for a fuller picture of how your business is doing.
How to increase gross profit
You can raise gross profit by earning more from each sale or spending less to deliver it. Small changes to price or costs add up across a year of sales.
- Review your prices against what similar businesses charge
- Negotiate better terms or bulk discounts with suppliers
- Reduce waste and product returns
- Promote the products or services with the best margins
Test one change at a time so you can see what’s working. There are more ways to increase profits once your direct costs are in shape.
Track your gross profit with Xero
Gross profit shows whether your sales earn enough to run your business, so it’s worth checking often. Xero pulls your sales and costs into easy-to-read financial reports, with bank feeds keeping the numbers up to date.
You’ll see gross profit on your profit and loss report whenever you need it, ready to share with your accountant. Try Xero today and get one month free.
FAQs on gross profit
Here are answers to common questions small business owners in Singapore ask about gross profit.
Can gross profit be negative?
Yes, it means your direct costs are higher than your sales. You’re selling below cost, so review your pricing and supplier costs quickly.
Should revenue include GST when I calculate gross profit?
Businesses registered for goods and services tax (GST) have charged 9% since 1 January 2024, according to the Inland Revenue Authority of Singapore (IRAS). That GST is owed to IRAS, so calculate revenue excluding it.
What is a good gross profit margin?
Good margins vary widely by industry, since a retailer and a consultancy have very different direct costs. Compare your margin with similar businesses or ask your accountant what’s realistic for your sector.
How often should I calculate gross profit?
Monthly works well for most small businesses because it lets you spot changes early. Accounting software can show it anytime without extra work.
Is a higher gross profit always better?
Not always. Heavy discounting can lift sales and gross profit in dollars while your margin falls, so check both figures together.
What’s the difference between gross profit margin and markup?
Margin divides gross profit by revenue, while markup divides it by cost. The homeware shop’s S$20,000 gross profit on S$30,000 of costs is a markup of about 66.7%, even though its margin is 40%.
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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.