How to Calculate Profit: Formula, Margin & Examples
Understanding how to calculate profit is one of the most fundamental skills in business and personal finance. Whether you're running a business, evaluating an investment, or pricing a product, knowing your profit — and your profit margin — tells you whether you're actually making money.
The Basic Profit Formula
Profit = Revenue − Total Costs
This is the simplest form. Revenue is the total money coming in from sales. Total costs include everything you spend to generate that revenue — materials, labor, overhead, marketing, and more.
Example: A freelance designer charges $3,000 for a project. They spend $400 on software and $200 on subcontractors. Profit = $3,000 − $600 = $2,400.
Gross Profit vs Net Profit
Gross Profit
Revenue minus the direct cost of goods sold (COGS). Doesn't include overhead, taxes, or operating expenses.
Revenue − COGS
Net Profit
Revenue minus ALL costs including operating expenses, taxes, interest, and depreciation. The "bottom line."
Revenue − All Expenses
How to Calculate Profit Margin
Profit Margin = (Profit ÷ Revenue) × 100
Profit margin expresses profit as a percentage of revenue. It's more useful than raw profit for comparing businesses of different sizes.
Revenue
$10,000
Cost
$7,000
Profit
$3,000
Margin
30%
Revenue
$50,000
Cost
$42,000
Profit
$8,000
Margin
16%
Revenue
$1,200
Cost
$900
Profit
$300
Margin
25%
Common Mistakes When Calculating Profit
Forgetting indirect costs
Many people only subtract direct costs (materials, labor) and forget overhead like rent, software subscriptions, and marketing.
Confusing revenue with profit
High revenue doesn't mean high profit. A business with $1M revenue and $950K costs has only 5% margin.
Ignoring your own time
Freelancers and solopreneurs often forget to value their own time as a cost, inflating apparent profit.
Not accounting for taxes
Net profit before tax looks better than after-tax profit. Always clarify which figure you're working with.
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