Profit is how much you’re able to keep after accounting for all expenses, operating costs, and debts. On the other hand, revenue is the total amount of income your business generates before factoring in expenses.

For example, a clothing brand may make $500K in revenue during its first year of operation, but it may only keep $100K of it in profit after all expenses are paid. 

Companies report both revenue and profit on an income statement, but they’re located in different areas. You’ll need to use those details to calculate your profit percentage.

Profit margin is a measurement of your remaining sales revenue after subtracting certain costs. The profit margin formula you need to use will depend on whether you want to know your gross or net profit margin.

Investors and lenders often use profit margin to further evaluate the profitability of your company. Profit margins are a reflection of your business’s overall financial health and growth potential.

Profit margin doesn’t appear on a balance sheet on its own. Instead, you’ll need to find each part of the profit margin formula you want to use. You can also use our gross profit margin calculator to save time or check your answers.

It’s also important to periodically revisit your profit margins and other key metrics such as net sales and markup percentage. Track and trend these figures over time to see whether you’re improving from one period to the next.

Gross profit is also known as sales profit or gross income. It measures how much profit is left after subtracting the costs of production.

This metric can help you determine whether your revenue is high enough compared to the cost of manufacturing and shipping your products.

In order to calculate gross profit, you’ll first want to review your revenue and the cost of goods sold. Once you have that information, use this formula to calculate profit:

Gross profit = revenue – cost of goods sold

Costs can fluctuate with varying levels of production. If your business operates seasonally, then certain times of the year may have higher production costs than others.

 Examples of variable costs can include: 

• Production supplies
• Commissions
• Utilities
• Delivery fees
• Packaging supplies 
• Raw materials

On the other hand, fixed costs can include: 

• Rent
• Salaries
• Insurance
• Loan repayments

If you want to calculate profit margin as a percentage, use this profit margin formula:

Gross profit margin = [(revenue – cost of goods sold) / revenue] × 100

If you sell a T-shirt for $30 and the cost of production is $27, then the formula would look like this:

Gross profit margin = [($30 – $27) / $30] × 100
Gross profit margin = 10%

In most cases, a good gross margin is between 7% and 10% of a product’s selling price. Keep in mind that a good gross profit can vary widely between industries. Businesses in retail or the food industry are known to have a lower gross margin percentage.

Additionally, it’s important to remember that gross margin and net profit margin can be significantly different based on your operating expenses. For example, the online retail sector has an average gross profit margin of 42.78 percent, while the industry’s net profit margin is only 0.64%.

You may want a higher profit margin, but that isn’t always possible without making your products too expensive.

The net profit for a business is best defined as the company’s total earnings after all expenses are subtracted from the equation. This includes interest and taxes.

Net profit is also known informally as “the bottom line” because it typically appears as the last line of your profit and loss statement after all expenses have been subtracted. This provides a real visual of how much profit your business has made.

Small businesses that are trying to scale may find this to be especially helpful. Knowing your net profit and net profit margin can make it easier to see whether your business is in good financial health. It can also indicate whether you need to make changes such as adjusting your marketing strategy or increasing prices.

Net profit can either be paid out to owners or reinvested into the business.

If you want to calculate net profit, use the following net profit margin formula: 

Net profit = gross profit – operating expenses

The first step is to calculate gross profit. From there, you’ll subtract additional operating expenses that aren’t included in the cost of goods sold.

If an eCommerce store makes $50,000 in revenue with a cost of goods sold of $30,000, then its gross profit would be $20,000. With $6,000 in additional operating expenses, the formula for net profit would look like this:

Net profit = $20,000 – $6,000 = $14,000

If you want to calculate net profit margin as a percentage, use this profit margin formula:

Net profit margin = [(gross profit – operating expenses) / revenue] × 100

This will provide you with another data point to determine whether your business has an appropriate profit margin.

Net profit margin is described as a percentage. In general, a net profit margin of at least 10% is considered to be good. A net profit margin above 20% is excellent. 

Your exact goals for net profit margin should be based on the averages in your industry. For most industries, a net profit margin below 5% can be financially risky. 

A low net profit margin could signal that your operating costs are too high. You may need to raise your selling price for key items by adjusting your markup percentage.

A company’s operating profit includes all earnings derived from core business functions. It doesn’t include non-operating income.  

Operating profit also excludes the following: 

• Interest
• Taxes
• Money from the sale of assets
• Earnings from stakes in other companies

An operating loss is when your core business income ends up being less than your expenses.

To calculate operating profit, use the following formula: 

Operating profit = revenue – cost of goods sold – operating expenses – day-to-day expenses

Day-to-day expenses include depreciation and amortization.

Operating profit demonstrates how effectively your business is able to manage its expenses in relation to revenue. It’s also one of the key data points analysts and investors use when evaluating a company. 

Similar to net profit, 5% operating profit margin is considered to be too low. For most industries, 10% is good and anything over 20% is excellent. Look up the profit margins for your specific industry to add context to your calculations.