How to calculate profit
Learn how to calculate profit, from the simple formula to gross, operating and net profit.
Published Wednesday 12 August 2026
Table of contents
Key takeaways
- Profit is the money left over after subtracting all expenses from your revenue, showing whether your business is financially healthy.
- The three main types of profit are gross profit, operating profit and net profit, each revealing different aspects of your business performance.
- Calculating profit regularly helps you make informed decisions about pricing, cost control and growth strategies.
- Improving profit comes down to increasing revenue, reducing costs or finding ways to boost your margins.
What is profit?
Profit is the money your business keeps after paying all its costs. In simple terms, it's revenue minus expenses.
When your revenue exceeds your expenses, you've made a profit. When expenses exceed revenue, you've made a loss. Tracking profit helps you understand whether your business is sustainable and growing.
The profit formula
Profit = revenue − expenses.
Revenue is all the money your business earns from selling goods or services. Expenses include everything you spend to run your business, from stock and materials to rent, salaries and utilities. Subtracting your total expenses from your total revenue gives you your profit figure.
Types of profit: gross, operating and net
There are three main profit measures, each telling you something different about your business. Understanding all three helps you identify where your money goes and how to measure profitability at each stage.
- Gross profit: revenue minus cost of goods sold (COGS). This shows how much you earn after covering the direct costs of producing your goods or services.
- Operating profit: gross profit minus operating expenses. Operating expenses include rent, utilities, wages and marketing. This figure shows how profitable your core business operations are.
- Net profit: revenue minus all expenses, including interest and tax. This is your bottom line, the actual amount you keep after every cost is accounted for.
How to calculate profit step by step
Follow these steps to calculate your profit accurately.
- Add up your total revenue for the period you're measuring.
- Calculate your cost of goods sold (COGS), including materials, stock and direct labour.
- Subtract COGS from revenue to find your gross profit.
- Add up your operating expenses, such as rent, utilities and salaries.
- Subtract operating expenses from gross profit to find your operating profit.
- Deduct interest payments and tax to arrive at your net profit.
Worked example in rand
Here's how a small South African retail business might calculate its profit for a month.
The business earns R150,000 in revenue from sales. The cost of goods sold, including stock purchased from suppliers, comes to R60,000.
- Gross profit: R150,000 − R60,000 = R90,000
Operating expenses for the month total R50,000, covering rent, staff wages and utilities.
- Operating profit: R90,000 − R50,000 = R40,000
After paying R3,000 in interest on a business loan and R10,000 in corporate tax, the final figure is calculated.
- Net profit: R40,000 − R3,000 − R10,000 = R27,000
Profit vs profit margin
While profit is a rand amount, profit margin expresses profit as a percentage of revenue. This makes it easier to compare performance across different time periods or against other businesses.
To calculate profit margin, divide your profit by revenue and multiply by 100. For example, if your net profit is R27,000 on R150,000 revenue, your net profit margin is 18%. Learn more about what profit margin means and how to use it.
How to improve your profit
There are three main ways to boost your profit: increase revenue, reduce costs or improve your margins.
To increase revenue, consider raising prices, expanding your customer base or introducing new products. To cut costs, look for more affordable suppliers, reduce waste or renegotiate contracts. Improving margins often means focusing on your most profitable products and finding operational efficiencies.
According to the Bureau of Market Research, drawing on Statistics South Africa's latest Annual Financial Statistics, the average after-tax profit margin across all South African businesses in 2024 was just 1.3%. This highlights how important it is to actively manage your profitability. For more strategies, explore how to increase your profits or review key profitability ratios.
Track your profit with Xero
Knowing how to calculate profit is essential, but tracking it consistently is what drives better decisions. Xero's accounting software gives you real-time visibility into your revenue, expenses and profit, so you always know where your business stands. Ready to take control of your finances? You can get one month free and see how Xero simplifies profit tracking.
FAQs on calculating profit
Here are answers to common questions about calculating profit.
What is the formula for profit?
The basic formula is profit = revenue − expenses. Depending on which type of profit you need, you'll subtract different categories of expenses from revenue.
What is the difference between gross and net profit?
Gross profit only deducts the cost of goods sold from revenue, while net profit deducts all expenses including operating costs, interest and tax. Net profit is your true bottom line.
Can a business have revenue but still make no profit?
Yes. If your expenses equal or exceed your revenue, you won't make a profit. A business can be generating sales while still running at a loss.
How often should I calculate my profit?
Monthly profit calculations give you timely insights into your business health. Many businesses also calculate quarterly and annual profit for tax and planning purposes.
Why is net profit the most important figure?
Net profit shows what you actually keep after all costs. It's the figure that determines how much cash is available to reinvest, save or distribute to owners.
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.