How to calculate gross profit

Published Monday 22 June 2026

Table of contents

• What is gross profit?
• Gross profit formula
• What is cost of goods sold (COGS)?
• How to calculate gross profit
• Gross profit calculation examples
• What is gross profit margin?
• Gross profit vs net profit
• How to improve your gross profit
• Why gross profit matters for your business
• Track your gross profit with Xero
• FAQs on gross profit

Key takeaways

• Gross profit is your total revenue minus the cost of goods sold (COGS), showing how much you keep from sales before covering operating expenses like rent, utilities and marketing.
• The formula is straightforward: Revenue - Cost of goods sold = Gross profit. You can calculate it for a single product, a product line or your entire business over any period.
• Gross profit margin, expressed as a percentage, makes it easier to compare performance across different periods, products or industries.
• Tracking gross profit regularly helps you set better prices, control costs and make confident decisions about where to focus your efforts.

What is gross profit?

Gross profit is the amount of money your business keeps after subtracting the direct costs of producing or delivering your goods and services. It's one of the first figures you'll see on a profit and loss (P&L) statement, sitting between your total revenue and your operating expenses.

Think of it as the money left over to cover everything else: rent, salaries, marketing, insurance and any other costs of running your business. If your gross profit is too low, there isn't enough left to pay those bills and still turn a profit.

Gross profit formula

Calculating gross profit uses a simple formula that applies to any type of business.

Gross profit = Revenue - Cost of goods sold (COGS)

Revenue is the total income from selling your products or services before any deductions. It's sometimes called sales or turnover. Cost of goods sold (COGS) covers only the direct costs tied to producing or delivering what you sell.

For example, if your business brings in £80,000 in revenue and your COGS is £30,000, your gross profit is £50,000.

What is cost of goods sold (COGS)?

Cost of goods sold (COGS) includes every direct expense involved in creating or delivering your product or service. Getting this number right is essential, because it directly affects your gross profit calculation.

What counts as COGS depends on your business type:

• Product businesses: raw materials, wholesale purchase costs, packaging, shipping to your warehouse, manufacturing labour directly tied to production
• Service businesses: direct labour costs for delivering the service, materials consumed during the job, subcontractor fees

COGS does not include indirect costs like office rent, administrative salaries, marketing spend, utility bills or insurance. Those fall under operating expenses and come out of your gross profit later when calculating net profit.

How to calculate gross profit

Follow these 3 steps to calculate gross profit for any period, whether it's a week, a month or a full financial year.

Step 1: Calculate your total revenue

Add up all income from sales during the period you're measuring. Include every sale of goods or services before any discounts, returns or allowances are applied. If you use accounting software like Xero, your revenue figures are already recorded through your invoices and bank feeds.

Step 2: Calculate your cost of goods sold

Total up every direct cost associated with producing or delivering what you sold during the same period. For a product business, this includes materials, stock purchases and direct production labour. For a service business, include the labour and materials used to deliver each job. Leave out indirect costs like rent, office supplies and marketing.

Step 3: Subtract COGS from revenue

Take your total revenue from Step 1 and subtract your COGS from Step 2. The result is your gross profit. If you sold £50,000 worth of goods and your COGS was £20,000, your gross profit is £30,000.

Gross profit calculation examples

Seeing the formula in action across different business types helps make it concrete. Here are 3 examples using realistic UK figures.

Retail business example

A clothing shop buys stock from wholesalers and resells it. In a given month, the shop generates £25,000 in sales revenue. The cost of purchasing that stock was £10,000, and shipping to the shop cost £1,500.

COGS = £10,000 + £1,500 = £11,500

Gross profit = £25,000 - £11,500 = £13,500

Service business example

A freelance graphic designer earns £8,000 in a month from client projects. Their direct costs include £500 for stock imagery licences and £1,200 paid to a subcontractor for overflow work.

COGS = £500 + £1,200 = £1,700

Gross profit = £8,000 - £1,700 = £6,300

Manufacturing business example

A small candle maker sells £15,000 worth of candles in a quarter. Direct costs include £3,000 for wax and fragrance oils, £1,000 for jars and packaging, and £2,500 for production labour.

COGS = £3,000 + £1,000 + £2,500 = £6,500

Gross profit = £15,000 - £6,500 = £8,500

What is gross profit margin?

Gross profit margin expresses your gross profit as a percentage of revenue. While gross profit tells you a pound amount, gross profit margin lets you compare profitability across different time periods, products or even against other businesses in your industry.

Gross profit margin = (Gross profit / Revenue) x 100

Using the retail example above: (£13,500 / £25,000) x 100 = 54%. That means the shop keeps 54p of every £1 in revenue after covering the direct cost of goods.

What counts as a "good" margin varies by industry. Retail businesses often aim for 50% or above, while service businesses can achieve higher margins because their direct costs tend to be lower. The key is to track your margin over time so you can spot trends and act on them before they become problems.

Gross profit vs net profit

Gross profit and net profit measure profitability at different stages. Understanding both gives you a fuller picture of your business finances.

Gross profit = Revenue - Cost of goods sold. It shows how efficiently you're producing or sourcing what you sell.

Net profit = Gross profit - Operating expenses (rent, salaries, utilities, marketing, taxes). It shows what's left after every cost is accounted for. You can learn more in the guide on how to calculate net profit.

A business can have a healthy gross profit but a low or negative net profit if operating expenses are too high. That's why both numbers matter. Gross profit tells you whether your pricing and production costs are sustainable. Net profit tells you whether your overall business model is working.

How to improve your gross profit

If your gross profit isn't where you'd like it to be, there are practical steps you can take to move the needle.

• Review your pricing. Small price increases can have a significant impact on gross profit, especially if your costs have risen since you last set your prices. Research what competitors charge and consider whether your prices reflect the value you deliver.
• Reduce your cost of goods sold. Negotiate better terms with suppliers, buy in larger quantities where cash flow allows, or look for alternative suppliers who offer comparable quality at a lower price.
• Cut waste. For product businesses, reducing spoilage, returns and overproduction directly lowers COGS. For service businesses, improving efficiency in how you deliver work has the same effect.
• Focus on higher-margin products or services. Look at your gross profit by product line or service type. Shift your sales focus towards the offerings that generate the most profit per pound of revenue.
• Track it regularly. Checking gross profit monthly (or even weekly) helps you catch problems early rather than discovering them at year end.

Why gross profit matters for your business

Gross profit isn't just an accounting figure; it's one of the most useful indicators of your business profitability. Tracking it consistently helps you make smarter decisions in several areas.

• Pricing decisions. If your gross profit margin is shrinking, it could mean your costs have risen or your prices haven't kept pace. Spotting this early gives you time to adjust.
• Cost control. A sudden drop in gross profit can flag supplier price increases, rising material costs or inefficiencies in your production process.
• Growth planning. Lenders and investors look at gross profit to assess whether your core business model is viable before they'll fund expansion.

With Xero, you can pull up a profit and loss report in a few clicks, or download a free profit and loss template to see your gross profit alongside revenue and COGS. Bank feeds and automatic reconciliation keep your numbers current, so you can act on your gross profit data rather than waiting until your accountant prepares end-of-year figures.

Track your gross profit with Xero

Calculating gross profit by hand works for one-off checks, but keeping track of it over time is where accounting software really helps. Xero brings your revenue, costs and reports together in one place so you can see your gross profit at a glance and spot trends as they happen.

With automatic bank feeds, smart reconciliation and customisable profit and loss reports, you can spend less time on the numbers and more time acting on them. Get one month free.

FAQs on gross profit

Here are answers to some frequently asked questions about gross profit.

What is the difference between gross profit and net profit?

Gross profit only deducts direct production costs, while net profit deducts every business expense. If your gross profit is healthy but your net profit is low, your operating costs rather than your pricing or production are likely the problem to solve.

Does gross profit include wages?

Only wages directly tied to producing or delivering your product or service count as part of COGS and affect gross profit. Administrative, sales and management salaries are operating expenses and don't come out of gross profit.

What is a good gross profit margin for a small business?

It varies by industry. Retail businesses often target margins of 50% or higher, while service businesses may see margins above 60%. The most important thing is to track your own margin over time and ensure it's stable or improving.

Can gross profit be negative?

Yes, if your cost of goods sold exceeds your revenue, your gross profit will be negative. This means you're spending more to produce or source your products than you're earning from selling them, which isn't sustainable.

How often should you calculate gross profit?

Check it at least monthly, but increase the frequency during seasonal peaks, after price changes, or when you're onboarding a new supplier. Automated accounting software makes this easy because your profit and loss figures stay current without manual updates.