What is Profit? Profit Definition
Profit is the financial gain remaining after all costs and expenses have been subtracted from the revenue generated by a business or sale. In its simplest form, profit is what you earn minus what you spend. It is the fundamental measure of a business's financial success and the primary incentive behind most commercial transactions.
Profit Formula — How to Calculate Profit
The basic profit formula is straightforward:
Where:
- Revenue = Selling Price per Unit × Quantity Sold
- Total Cost = Cost Price per Unit × Quantity Sold
- Profit per Unit = Selling Price − Cost Price
What is Gross Profit? Gross Profit Definition
Gross profit is the profit a company makes after deducting the costs directly associated with making and selling its products or services (the cost of goods sold, or COGS). It shows how efficiently a business uses labor and supplies in the production process.
Gross profit differs from net profit in that it does not include operating expenses such as salaries, rent, marketing, and taxes. It measures how efficiently a company produces and sells its core products.
How to Calculate Gross Profit — An Example
Let's say you run a small online store selling handmade candles:
- Cost price (materials + labor) per candle: $8.00
- Selling price per candle: $20.00
- Number of candles sold this month: 150
Step 1: Revenue = $20.00 × 150 = $3,000.00
Step 2: Total Cost = $8.00 × 150 = $1,200.00
Step 3: Gross Profit = $3,000.00 − $1,200.00 = $1,800.00
Your gross profit for the month is $1,800.00. You keep $1,800 from every $3,000 in sales before accounting for other business expenses.
How to Calculate Profit Percentage (Profit Margin)
Profit margin tells you what percentage of each dollar of revenue is actual profit. It is one of the most important metrics for evaluating business health.
Using the candle example:
Profit Margin = ($1,800 / $3,000) × 100 = 60%
This means 60 cents of every dollar earned is gross profit.
Markup vs. Profit Margin
Markup and profit margin are related but different concepts that are often confused:
- Profit Margin = (Profit / Revenue) × 100 — percentage of the selling price that is profit
- Markup = (Profit / Cost) × 100 — percentage above cost that you charge customers
Using the candle example (per unit: cost $8, price $20, profit $12):
- Profit Margin = ($12 / $20) × 100 = 60%
- Markup = ($12 / $8) × 100 = 150%
A 150% markup results in a 60% profit margin. Knowing both helps you price products correctly and communicate margins to investors or partners.
FAQs
What is a good profit margin?
It depends heavily on the industry. Retail businesses typically operate at 2–10% net profit margins, while software companies can see margins above 60%. For gross profit, margins of 40–60% are considered healthy across many sectors. A higher margin generally means more financial cushion.
Can profit be negative?
Yes. When total costs exceed revenue, the result is a negative profit, commonly called a loss. Understanding your break-even point — where revenue exactly equals total cost — is critical for sustainable business planning.
What is the difference between profit and revenue?
Revenue (also called sales or turnover) is the total amount of money generated from sales before any costs are deducted. Profit is what remains after subtracting all relevant costs from revenue. A business can have high revenue but low or even negative profit if costs are too high.
How does this Profit Calculator work?
Enter your cost price per unit, selling price per unit, and the quantity sold. Select your preferred currency — the calculator supports over 35 world currencies including USD, RUB (Russian Ruble), EUR, GBP, and many others. The calculator will instantly compute your revenue, total cost, gross profit, profit per unit, profit margin percentage, and markup percentage.