How to calculate gross profit
Learn how to calculate gross profit with the revenue minus COGS formula and clear worked examples.
Published Wednesday 12 August 2026
Table of contents
How to calculate gross profit
Key takeaways
- Gross profit is your revenue minus cost of goods sold (COGS); it shows how much you keep after the direct costs of delivering your product or service.
- The formula is simple: Revenue − COGS = Gross profit, calculated for any period using figures from your profit and loss report.
- Gross profit differs from net profit: gross profit covers only direct costs, while net profit accounts for all expenses including rent, salaries, and taxes.
- Tracking gross profit regularly helps you spot pricing problems, rising costs, and margin trends early.
What is gross profit?
Gross profit is the money your business earns after subtracting the direct costs of producing or delivering goods and services. It is one of the most important numbers on your profit and loss report because it acts as a health check on your pricing and direct costs.
For example, if you sell handmade candles for R450 each and the wax, wicks, jars, and labour cost R180 per candle, your gross profit is R270 per candle.
Gross profit formula
The formula for gross profit is:
Gross profit = Revenue − Cost of goods sold (COGS)
Revenue is your total income from selling goods or services before any deductions (also called sales or turnover). COGS refers to the direct costs of producing or delivering what you sell:
- For product businesses: raw materials, manufacturing labour, and shipping
- For service businesses: direct labour and materials
Your cost of goods sold excludes indirect expenses like office rent, marketing, utilities, or administrative salaries. Those are subtracted later when calculating net profit.
How to calculate gross profit step by step
Follow these four steps to calculate your gross profit for any period.
1. Determine your revenue
Add up all sales income for the period. Exclude non-operating income like interest earned or one-off asset sales.
If you use Xero, your total revenue appears on your profit and loss report, calculated automatically from invoices and sales transactions.
2. Calculate your cost of goods sold (COGS)
Add up all direct costs for the same period. Common COGS items include:
- Raw materials and supplies
- Direct labour (wages for employees who make or deliver the product)
- Manufacturing or production costs
- Freight and shipping for inventory
- Packaging materials
Service businesses might include wages of delivery staff, software licences used in delivery, or subcontractor fees.
3. Subtract COGS from revenue
Apply the formula to get your gross profit. For example, if your business earned R120,000 in revenue last quarter and COGS was R45,000, then R120,000 − R45,000 = R75,000 gross profit.
4. Interpret the result
A positive gross profit is good, but it does not mean overall profit. A low or negative gross profit signals that pricing is too low or costs are too high. Tracking gross profit over time gives you more insight than looking at a single number.
Gross profit calculation examples
The following examples show how to calculate gross profit for a product business and a service business.
Product business example
Sarah runs a small online store selling custom phone cases. In March she sold 500 cases at R550 each, for R275,000 revenue. Her COGS included R40,000 for materials, R25,000 for direct labour, and R5,000 for shipping supplies.
- Revenue: R275,000
- COGS: R40,000 + R25,000 + R5,000 = R70,000
- Gross profit: R275,000 − R70,000 = R205,000
Sarah kept about 75% of revenue after direct costs. This amount must still cover website hosting, marketing, insurance, and other overhead.
Service business example
Tom runs a small landscaping company. In April he earned R220,000 from client jobs. His COGS included R60,000 for crew wages, R20,000 for fuel and equipment maintenance, and R10,000 for supplies like mulch and fertiliser.
- Revenue: R220,000
- COGS: R60,000 + R20,000 + R10,000 = R90,000
- Gross profit: R220,000 − R90,000 = R130,000
This gross profit must cover Tom's vehicle payments, office expenses, insurance, and his own salary.
Gross profit vs gross profit margin
Gross profit is a rand amount, while gross profit margin is a percentage. The margin shows how much of each rand in revenue you keep after direct costs.
Gross profit margin = (Gross profit ÷ Revenue) × 100
Using Sarah's example: (R205,000 ÷ R275,000) × 100 = about 75%. The margin lets you compare performance across periods and benchmark against similar businesses.
What is a good gross profit margin?
A good gross profit margin depends on your industry. Retail businesses often see margins between 20% and 50%, while service businesses can range from 50% to 70% or higher.
Margins vary by industry, region, and business model. The real value comes from tracking your own margin over time and comparing it to similar businesses rather than chasing a single benchmark.
Gross profit vs net profit
Both gross profit and net profit appear on your profit and loss report, but they answer different questions. Gross profit covers only direct costs, while net profit shows what remains after all expenses.
- Gross profit = Revenue − COGS
- Net profit = Revenue − COGS − Operating expenses − Interest − Taxes
Operating expenses include rent, utilities, marketing, and salaries. A business can have strong gross profit but low or negative net profit if overheads are too high.
What affects your gross profit?
Several factors influence your gross profit. Understanding them helps you spot problems and opportunities.
- Changes in COGS: rising material prices or labour costs reduce gross profit even if sales stay steady.
- Pricing adjustments: raising prices increases gross profit per sale, while discounting reduces it.
- Sales volume: selling more units can improve gross profit, but only if margins stay healthy.
- Production efficiency: reducing waste or speeding up processes lowers COGS.
- Supply chain disruptions: delays or shortages can force you to pay more for materials or shipping.
How to improve your gross profit
Improving gross profit comes down to earning more from each sale or reducing direct costs. Here are practical ways to measure profitability and strengthen your margins.
- Review your pricing: make sure prices reflect current costs and market conditions.
- Negotiate with suppliers: ask for bulk discounts or better payment terms.
- Reduce waste: cut material spoilage and improve production processes.
- Focus on higher-margin products or services: shift your sales mix toward what earns more per rand.
- Track your numbers regularly: review gross profit monthly to catch trends early.
Limitations of gross profit
Gross profit is useful, but it has limits.
- It ignores operating expenses, interest, and taxes, so it is not a measure of overall profitability.
- Comparing gross profit across very different industries can mislead because cost structures vary widely.
- On its own, gross profit does not tell you whether the whole business is profitable. That is where net profit comes in.
Track your gross profit with Xero
Xero pulls revenue and cost of goods sold into a profit and loss report automatically, so you always know your gross profit. You can run reports anytime, compare periods, see where you stand, and get one month free to try it.
FAQs on gross profit
Here are answers to common questions about gross profit.
Can gross profit be negative?
Yes. A negative gross profit means your cost of goods sold is higher than your revenue, signalling a serious pricing or cost problem.
How often should I calculate gross profit?
Monthly is ideal for most small businesses. Compare the same month year over year if your business is seasonal.
Does gross profit include employee salaries?
Gross profit includes only wages of employees directly involved in producing or delivering the product or service. Other salaries are operating expenses subtracted for net profit.
What's the difference between gross profit and gross income?
In most small business contexts they mean the same thing: revenue minus cost of goods sold. Some tax forms use the terms slightly differently, so check with your accountant.
Can a service business have cost of goods sold (COGS)?
Yes. A service business's COGS includes direct costs like the wages of staff delivering the service, subcontractor fees, and materials used to deliver it.
How do you calculate gross profit margin?
Divide gross profit by revenue and multiply by 100. It shows the percentage of revenue you keep after direct costs.
Related terms
Learn more about gross 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.