What Is Gross Profit? Formula, How To Calculate & Calculator

Gross profit is the amount your business earns after subtracting the direct costs of producing or delivering your products or services. It shows how efficiently you're turning revenue into profit before accounting for other expenses like salaries, rent, or marketing.

Tracking gross profit over time helps you understand the real performance of your core operations.

Whether you're monitoring profitability, setting pricing strategies, or comparing margins across products, gross profit is a key metric every finance team should keep an eye on. 

Gross Profit Formula, How to Calculate It & Calculator

To calculate gross profit, start with your total revenue and subtract the cost of goods sold (COGS). Here's the basic formula:

Gross Profit = Revenue – Cost of Goods Sold (COGS)

Revenue refers to the total income from sales before any expenses are taken out.

COGS includes the direct costs of producing your product or delivering your service—things like raw materials, labor directly tied to production, and manufacturing overhead.

Example:

If your business earns $500,000 in revenue and spends $300,000 on COGS, your gross profit would be:

$500,000 – $300,000 = $200,000

Understanding how to calculate gross profit is the foundation for analyzing profitability and setting smarter financial targets. It also helps put your gross profit margin (covered later) into context.

Gross Profit Calculator

Gross Profit vs. Gross Profit Margin

While gross profit gives you the raw dollar amount your business retains after covering direct costs, gross profit margin puts that number into perspective by showing it as a percentage of revenue. You can read more about the differences between profit and revenue in our dedicated article.

Here’s the formula for gross profit margin:

Gross Profit Margin = (Gross Profit ÷ Revenue) × 100

This percentage tells you how much of every dollar earned translates into gross profit. It’s especially useful when comparing profitability across different products, business units, or time periods—since it accounts for the scale of your revenue.

Example:

Using the earlier example:
Gross Profit = $200,000
Revenue = $500,000

Gross Profit Margin = (200,000 ÷ 500,000) × 100 = 40%

That 40% margin means your business keeps $0.40 in gross profit for every $1 of sales before accounting for other operating expenses. Both metrics are important—but gross profit margin helps you benchmark efficiency and performance more accurately over time.

How to Improve Gross Profit

Gross profit benchmarks vary between different industries, however improving your gross profit starts with optimizing two key levers: revenue and cost of goods sold (COGS).  

Even small shifts in pricing, sourcing, or operations can make a noticeable impact on your bottom line.

#1. Increase Revenue Without Raising Costs

• Adjust pricing strategically based on market demand or value delivered.
• Upsell or cross-sell to increase the average transaction value.
• Focus on high-margin products or services.

#2. Reduce COGS

• Negotiate better terms with suppliers.
• Streamline production or service delivery to reduce waste and inefficiencies.
• Explore alternative materials or vendors without compromising quality.

#3. Monitor Profitability by Product or Service

• Break down gross profit by category to identify what’s working—and what’s not.
• Shifting focus to your most profitable areas can improve your overall margin without increasing overhead.

Improving gross profit isn’t just about cutting costs or raising prices — it’s about making smarter, more sustainable decisions across your business. Now that you understand how it’s calculated and how to improve it, let’s clear up some common questions around gross profit and how it fits into your broader financial picture.

FAQs About Gross Profit

1. Is gross profit the same as net profit?
   No. Gross profit only subtracts the direct costs of goods or services sold. Net profit subtracts all expenses, including operating costs, taxes, and interest, giving you a clearer picture of your bottom line.
2. What’s included in cost of goods sold (COGS)?
   COGS includes direct costs like raw materials, production labor, and manufacturing supplies. It doesn’t include indirect costs like rent, marketing, or administrative salaries.
3. Can gross profit be negative?
   Yes. If your COGS exceeds your net sales, you’ll have a negative gross profit—often a sign of pricing issues, inefficiency, or unsustainable cost structures.
4. How often should I track gross profit?
   Monthly tracking is common, but high-volume or fast-scaling businesses may monitor it weekly. The key is consistency—so you can spot trends and make informed decisions quickly.
5. Does gross profit apply to service-based businesses?
   Yes, it is a SaaS KPI but COGS may look different. For service businesses, COGS can include direct labor and tools or software used to deliver the service, rather than physical materials.

Turn Gross Profit Insights Into Smarter Decisions

Gross profit is more than just a line on your income statement — it’s a key indicator of how efficiently your business turns revenue into real earnings. By understanding how to calculate it, track it over time, and improve it, you’ll be in a stronger position to make strategic decisions that support growth and profitability.

Want to take your analysis further? Explore how Vena’s Profitability Analysis Software can help you track gross profit, forecast margins, and uncover deeper insights with built-in financial intelligence.