Gross profit formula, its definition, and why it matters for your business
Gross profit is the money your business keeps after subtracting the direct costs of producing or delivering what you sell.
Gross profit formula:
Gross profit = Revenue - Cost of goods sold (COGS)
Revenue is the total income your business earns from sales before expenses. COGS includes the direct costs tied to making, buying, shipping, or delivering your product or service.
For example, if your business brings in $50,000 in revenue and spends $20,000 on COGS, your gross profit is $30,000.
Gross profit helps you see whether your core product or service is profitable before factoring in operating expenses like rent, marketing, taxes, and admin costs. In this guide, we’ll break down how to calculate gross profit, how it differs from net profit, and how to use it to make smarter pricing and spending decisions.
What is gross profit?
Gross profit is the amount of money left after subtracting the cost of goods sold from total revenue.
It shows how efficiently your business makes or delivers what it sells. A higher gross profit usually means your products, pricing, or delivery costs are working well. A lower gross profit can be a sign that production costs are too high, pricing is too low, or both.
Gross profit does not include operating expenses like rent, marketing, admin salaries, software, taxes, or interest. Those costs are considered later when calculating operating profit or net profit.
What is the gross profit formula?
The gross profit formula is: Gross profit = Revenue - Cost of goods sold
Here’s what each part means:
Revenue: The total amount your business earns from selling products or services before expenses are deducted.
Cost of goods sold: The direct costs involved in making, buying, or delivering the products or services you sold. This can include raw materials, inventory costs, direct labor, production costs, and shipping costs tied directly to the sale.
For example, if your business earns $80,000 in revenue and spends $35,000 on COGS, your gross profit is: $80,000 - $35,000 = $45,000. That means your business has $45,000 left to cover operating expenses and contribute to profit.
How to calculate gross profit
To calculate gross profit, follow these steps:
Find your total revenue for a specific period, such as a month, quarter, or year.
Calculate your COGS for the same period.
Subtract COGS from revenue using the gross profit formula.
Gross profit margin formula
Gross profit tells you the dollar amount your business keeps after COGS. Gross profit margin shows that amount as a percentage of revenue.
Gross profit margin formula: Gross profit margin = (Gross profit / Revenue) × 100
For example, if your revenue is $50,000 and your gross profit is $30,000, your gross profit margin is: ($30,000 / $50,000) × 100 = 60%.
That means your business keeps 60 cents from every dollar of revenue after covering the direct costs of making or delivering what it sells. Gross profit margin is useful because it makes it easier to compare profitability across products, services, time periods, or business lines.
What is included in COGS?
COGS includes the direct costs tied to producing or delivering the products or services your business sells. This can include raw materials, inventory costs, direct labor, manufacturing supplies, packaging, freight-in or production shipping, and production-related overhead. It usually does not include general business expenses like marketing, office rent, admin salaries, software, sales commissions, taxes, or interest payments. The exact costs included in COGS can vary by business model. For example, a retailer may include wholesale inventory costs, while a service business may include the direct labor required to deliver client work.
Gross profit examples by business type
Gross profit looks slightly different depending on how your business makes money.
Retail business:
A retailer calculates gross profit by subtracting the cost of buying or producing inventory from product sales. For example, if a store sells $10,000 worth of clothing and the inventory cost was $4,000, its gross profit is $6,000.
Restaurant:
A restaurant may subtract food ingredients, kitchen labor, packaging, and other direct food preparation costs from total food and beverage sales.
Service business:
A service business may subtract the direct cost of delivering client work, such as contractor payments, billable team hours, or project-specific expenses.
SaaS business:
A SaaS company may subtract costs directly tied to delivering the product, such as hosting, infrastructure, customer support, or implementation costs.
The goal is the same across each business type: separate the costs directly tied to selling your product or service from the broader costs of running the business.
Why is gross profit so important for your business?
Gross profit is important for your business because it acts as a clear indicator of how well your business is performing in the most fundamental way. When you have a steady and healthy gross profit, it usually means your production methods are working and your products are doing well in the market.
It’s also important to keep an eye on how your gross profit changes over time. This helps you make big decisions about the future of your business, like whether to expand, shift focus, or make improvements. In this same vein, tools like Expensify are super handy when it comes to managing spend and monitoring trends accurately. Using them helps you make choices based on solid data rather than gut feelings.
What’s a good gross profit percentage?
A "good" gross profit percentage can vary greatly depending on the industry in which your business operates. For instance, goods-producing industries like retailers, restaurants, and manufacturers might consider a gross profit margin of 50% to 70% healthy. However, this standard doesn't apply universally.
Service industry companies like financial institutions, legal firms, and tech businesses often operate with significantly higher gross profit margins — sometimes in the high 90% range. This is largely due to their lower production costs than companies producing physical goods.
On the other end of the spectrum, industries like retail might see gross profit percentages on the lower side, ranging from a modest 3% to 13%. It really depends on what your business does and what kinds of products or services you’re producing.
To gauge whether your business is truly in a healthy place, you should also consider other key indicators:
Are you maintaining a positive cash flow, indicating that your business is generating more money than it's spending?
Can you comfortably pay your employees a fair wage without financial strain?
Do you have sufficient funds set aside for emergencies or unexpected downturns?
Is your business generating enough profit to reinvest in growth opportunities?
If you can answer “yes” to these questions, it's a strong sign that your business is not only surviving but also thriving.
What’s the difference between gross profit and net profit?
The difference between gross profit and net profit lies in the costs deducted from revenue. Essentially, gross profit tells you how much money you make just from selling your products, while net profit shows what's left after paying all your business expenses.
Gross profit is calculated by subtracting the cost of goods sold from total revenue, giving you a look at the profitability of your core products or services.
Net profit, also known as the bottom line, is determined by subtracting all expenses, including operating expenses, taxes, interest, and depreciation, from the gross profit.
Simplify your money management with the right tools
As a small business owner, managing finances, nailing down a pricing strategy, and calculating gross profit can seem overwhelming. However, a suite of effective tools can streamline this process, allowing you to concentrate on expanding your business rather than getting bogged down in numbers. Consider incorporating a mix of the following resources to keep your financial management efficient and accurate:
Expense management software: Expense management apps are ideal for tracking spending, effortlessly creating expense reports, cataloging eReceipts, and ensuring precise gross profit calculations.
Accounting systems: Choose from a range of accounting solutions to automate bookkeeping, manage invoices, and monitor financial health. If you want to make your day-to-day even easier, consider accounting software that integrates with your expense management apps.
Budgeting tools: Consider user-friendly budgeting apps to keep a tight rein on your expenses, forecast future spending, and ensure your finances stay on track.
By integrating these tools into your financial toolkit, you can maintain a comprehensive overview of your business’s fiscal landscape while keeping your focus on growth and innovation. Also, don’t forget to run a situational analysis. This step is crucial for understanding how changes in the market, industry trends, and other external factors may impact your gross profit and overall business performance.
Make gross profit easier to track with Expensify
Gross profit is only useful when the numbers behind it are accurate. Expensify helps businesses keep expense data organized, categorized, and ready to sync with their accounting system, so finance teams and business owners can spend less time chasing receipts and more time understanding performance.
From receipt scanning and expense reports to company card tracking and accounting integrations, Expensify gives businesses a clearer view of spend. That makes it easier to monitor costs, protect margins, and make confident financial decisions.
FAQs about the gross profit formula
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Subtract the cost of goods sold (COGS) from total revenue using this formula: gross profit = revenue - cost of goods sold.
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Gross profit shows how efficiently a company produces and sells its products, revealing what money remains after production costs to cover operating expenses, pay dividends, and build reserves.
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Goods-producing industries typically aim for 50% to 70%, while service companies often achieve margins in the high 90% range due to lower production costs.
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The formula for gross profit margin is:
Gross profit margin = (Gross profit / Revenue) × 100
Gross profit margin shows gross profit as a percentage of revenue.
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No. Gross profit is a dollar amount, while gross margin is a percentage. Gross profit shows how much money is left after COGS. Gross margin shows what percentage of revenue remains after COGS.
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No. Gross profit only subtracts the cost of goods sold from revenue. Operating expenses like rent, marketing, admin salaries, software, taxes, and interest are not included in gross profit.
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Yes. Gross profit can be negative if your cost of goods sold is higher than your revenue. This means your business is spending more to produce or deliver what it sells than it earns from those sales.
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Gross profit usually appears near the top of an income statement, after revenue and cost of goods sold. It comes before operating expenses, operating profit, taxes, and net profit.
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A business can improve gross profit by increasing prices, reducing production costs, negotiating better supplier rates, improving operational efficiency, or focusing on higher-margin products and services.
