How to Calculate Profit — Formula, Examples & Tips
Profit is the foundation of every business decision. Learn the exact formulas for gross profit, net profit, and profit margin — with real examples you can apply immediately. Once you understand profit, you can also calculate ROI (Return on Investment) to evaluate whether your spending is paying off.
What Is Profit?
Profit is the money left over after subtracting all costs from revenue. It's the clearest measure of whether a business is financially healthy. There are three main types:
Gross Profit
Revenue minus cost of goods sold (COGS). Measures production efficiency.
Operating Profit
Gross profit minus operating expenses. Measures business efficiency.
Net Profit
Operating profit minus taxes and interest. The true bottom line.
Profit Formulas
Revenue − Cost of Goods Sold (COGS)Revenue − Total Costs (COGS + Operating + Taxes + Interest)(Net Profit ÷ Revenue) × 100(Gross Profit ÷ Revenue) × 100Step-by-Step Examples
E-commerce Store
Revenue: $50,000
COGS (products): $20,000
Operating expenses: $12,000
Gross Profit = $50,000 − $20,000 = $30,000
Net Profit = $30,000 − $12,000 = $18,000
Net Profit Margin = ($18,000 ÷ $50,000) × 100 = 36%
A 36% net margin is excellent for e-commerce. Industry average is typically 10–20%.
Restaurant
Monthly Revenue: $80,000
Food & Beverage Cost: $28,000
Labor + Rent + Utilities: $38,000
Gross Profit = $80,000 − $28,000 = $52,000
Net Profit = $52,000 − $38,000 = $14,000
Net Margin = 17.5%
Restaurants typically operate at 3–9% net margin. 17.5% indicates strong cost control.
Freelance Designer
Annual Revenue: $120,000
Software & Tools: $3,600
Marketing & Misc: $2,400
Net Profit = $120,000 − $6,000 = $114,000
Net Margin = 95%
Service businesses have very high margins because there's no physical product cost. The main cost is time.
What Is a Good Profit Margin?
| Industry | Avg Net Margin | Notes |
|---|---|---|
| Software / SaaS | 20–30% | High margins due to low COGS |
| E-commerce | 10–20% | Varies by product category |
| Retail | 2–5% | High volume, thin margins |
| Restaurant | 3–9% | High overhead, labor costs |
| Consulting | 25–40% | Service-based, low overhead |
| Manufacturing | 5–10% | Capital intensive |
Calculate It Yourself
Use our free profit calculator to instantly compute gross profit, net profit, and margin for your business. No signup required.
Frequently Asked Questions
What is the difference between profit and revenue?
Revenue is the total money earned from sales. Profit is what remains after subtracting all costs. A business can have high revenue but low or negative profit if costs are too high.
Can profit be negative?
Yes. Negative profit (a loss) means costs exceeded revenue. This is common for startups investing in growth, but unsustainable long-term.
How do I increase profit margin?
Either increase revenue (raise prices, sell more) or reduce costs (negotiate supplier rates, cut overhead). The most effective approach is usually a combination of both.
Is gross profit or net profit more important?
Both matter. Gross profit shows production efficiency. Net profit shows overall business health. Investors typically focus on net profit margin for valuation.