Gross profit
Gross profit is revenue minus the cost of what you sold. Learn the formula and why it matters.
Published Wednesday 12 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 the money left after subtracting the cost of sales from your revenue, showing how efficiently you turn sales into profit.
- The formula is simple: gross profit = revenue − cost of sales. It appears near the top of your profit and loss statement.
- Gross profit differs from net profit, which accounts for all operating expenses, interest and taxes, not just direct costs.
- Tracking gross profit helps you make informed pricing decisions and identify where to cut production costs.
What is gross profit?
Gross profit is the money your business keeps after subtracting the direct cost of the goods or services you sold from your revenue. It's the first measure of profitability and appears near the top of your profit and loss statement, giving you a quick snapshot of how well your core operations perform before other expenses come into play.
The gross profit formula
Calculating gross profit is straightforward once you know your revenue and cost of sales.
The formula is: Gross profit = revenue − cost of sales.
For example, if a small retailer in Johannesburg earns R500,000 in sales revenue and spends R300,000 on the goods it sold, the gross profit is R200,000. That R200,000 is available to cover rent, salaries, marketing and other operating expenses.
What is included in gross profit
Gross profit includes two components: revenue and cost of sales.
- Revenue is your top-line sales, the total money earned from selling goods or services before any deductions.
- Cost of sales (also called cost of goods sold) covers direct costs tied to production, such as raw materials, direct labour and manufacturing expenses.
Operating expenses like rent, administrative salaries, marketing, interest and tax are excluded from gross profit. In South African tax terms, the SARS Tax Guide for Small Businesses describes gross profit as sales less cost of sales, which aligns with this definition.
Gross profit vs gross profit margin
While gross profit is a rand amount, gross profit margin expresses that figure as a percentage of revenue.
The formula is: Gross profit margin = (gross profit ÷ revenue) × 100.
Using the earlier example, a R200,000 gross profit on R500,000 revenue gives a 40% gross profit margin. A good gross profit margin varies widely by industry, so compare your margin to similar businesses in your sector rather than a universal benchmark.
Gross profit vs net profit
Gross profit and net profit measure profitability at different stages.
Gross profit is what remains after direct costs only. Net profit is what remains after all costs, including operating expenses, interest and tax. Both appear on the profit and loss statement: gross profit near the top and net profit at the bottom. Watching both figures helps you understand whether rising costs sit in production or elsewhere in the business.
Why gross profit matters
Gross profit shows how efficiently you turn sales into profit before overhead kicks in.
A healthy gross profit funds your operating expenses, from rent to payroll to marketing. It also guides pricing decisions: if your gross profit shrinks, you may need to raise prices or find cheaper suppliers. Tracking it regularly helps you spot cost creep early and measure profitability at the source.
According to Statistics South Africa's Annual Financial Statistics, as analysed by the Bureau of Market Research, the average after-tax profit margin across all South African businesses was just 1.3% in 2024. With economy-wide margins that thin, keeping a close eye on gross profit (the first profitability measure) becomes even more important.
Track your gross profit with Xero
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FAQs on gross profit
Below are common questions about gross profit and how it applies to your business.
Is gross profit the same as revenue?
No. Revenue is the total money earned from sales before any costs are subtracted. Gross profit is what remains after you deduct the cost of sales from that revenue.
Can gross profit be negative?
Yes. If your cost of sales exceeds your revenue, you have a negative gross profit (sometimes called a gross loss). This signals that your pricing, supplier costs or production efficiency need urgent attention.
What is a good gross profit margin?
It varies widely by industry. Service businesses with low direct costs often run higher gross margins than retailers who buy stock to resell. Benchmark against similar businesses in your sector rather than aiming for a single universal figure.
Where does gross profit appear on financial statements?
Gross profit sits near the top of the profit and loss statement, just below revenue and cost of sales. Net profit appears at the bottom after all other expenses are deducted.
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.