Quick answer: Gross Profit = Revenue − Cost of Goods Sold. Net Profit = Gross Profit − Operating Expenses. Profit Margin = Net Profit ÷ Revenue × 100. Try our free Business Profit Calculator.
Gross Profit vs Net Profit
Gross profit shows what's left after direct production costs. Net profit subtracts everything else too — rent, salaries, marketing, utilities — showing your true bottom line.
Why Profit Margin Matters More Than Raw Profit
A business earning $50,000 profit on $100,000 revenue (50% margin) is far healthier than one earning $50,000 on $1,000,000 revenue (5% margin), even though the dollar profit is identical. Margin reveals efficiency.
Frequently Asked Questions
What's a good profit margin?
It varies widely by industry — retail often runs 2-5%, software can exceed 20-30%. Compare against your specific industry benchmark.
What counts as an operating expense?
Rent, salaries, utilities, marketing, insurance, and other costs not directly tied to producing the product or service.
Is this useful for a solo freelancer too?
Yes — track your revenue against costs and time to see your true effective profit.
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Open the Tool →Worked example: turn profit into a percentage
Profit margin compares profit with revenue. If a business earns $12,000 in sales and its relevant costs for the calculation are $9,000, profit is $3,000. The margin is ($3,000 ÷ $12,000) × 100 = 25%. In other words, the business keeps 25 cents of profit for each dollar of revenue under that definition of profit.
Be clear about which margin you mean. Gross margin usually compares revenue with the cost of goods sold. Net margin uses profit after a broader set of expenses. Do not compare two companies unless they use a comparable period and accounting definition. The IRS explains gross profit for a product business as net receipts minus cost of goods sold; service businesses may calculate relevant costs differently.
Margin is not markup
Margin divides profit by the selling price (revenue). Markup divides profit by the cost. If an item costs $80 and sells for $100, profit is $20: the margin is 20%, while the markup is 25%. Mixing these measures can lead to prices that are lower than intended.
This is a planning calculation, not a full accounting or tax result. For financial statements and tax reporting, follow the rules that apply in your jurisdiction and use consistent records.
Use matching time periods
When comparing margins, calculate revenue and costs for the same period and business scope. A monthly revenue figure should not be compared with annual expenses. Separate one-off costs from recurring operations when you need an operating view, and document whether the result is gross, operating, or net margin. The ratio helps describe profitability, but it does not show cash flow, debt payments, or whether invoices have been collected. Use bookkeeping records for decisions and tax reporting.